Year End Tax Planning

For all organisations with a financial year ending on 31st March the time to review capital equipment expenditure is now. 

The need for businesses to invest in new technology to increase productivity and reduce cost has never been greater. The tax system will continue to support business investment throughout 2023, but to take full advantage of tax allowances available for their current accounting or financial year, some businesses might need to act swiftly. 

In November last year, the Chancellor announced that the Annual Investment Allowance (AIA) would be set at a permanent level of £1,000,000 each year. This marked the continuation of a temporary allowance that has been in place since 2019. The AIA is the amount of money a business can spend on the purchase of most capital equipment and claim the full capital allowance in the accounting year in which the acquisition was completed. Therefore, providing stock is available and can be delivered by the end of Q1 2023, any AIA available will apply to the current financial year for businesses having a financial year ending in March 2023, this demographic will include most sole-traders and partnerships as well as a number of limited companies. 

Further for limited companies acquiring new capital equipment, the more restricted but more generous super-deduction capital allowance might be available, but be aware that there are exemptions, and the scheme runs only until the end of March. 

The key to making full use of AIA is to ensure that the allowance is allocated in the most financially advantageous way between accounting years. This means that unless a business has a financial year that coincides with the calendar year (January to December) it will often prove beneficial to allocate any annual investment allowance for 2023 between the two accounting years that fall within the calendar year, and this is where 31st March becomes a significant date. Many businesses have a financial year that ends on this date which means that they might decide to bring forward some or all of their forthcoming capital equipment expenditure, or, if they intend spending the full £1,000,000 available for 2023 and want to apply the allowance equally between their current and next financial years, they should use £250,000 of annual investment allowance between 1 January and 31st March 2023 and the remaining £750,000 between April and December. Maximising the benefit of tax allowances available can therefore provide a strong reason to bring forward expenditure on capital equipment providing delivery can be completed during January, February, or March. 

The additional good news is that businesses can acquire the equipment they need now and get the full immediate benefits of the AIA or super-deduction without the need for a large cash outlay. This is possible because equipment subject to hire purchase finance agreements qualifies for AIA or super-deduction in exactly the same way as equipment purchased outright. In other words, businesses can get the tax allowances in their current accounting year but spread the cost of purchase over a number of future years. In addition, the interest element of any hire purchase agreement can also be fully offset against tax. In conclusion some businesses might need to act fast and bring forward their capital expenditure plans for 2023. 

BNP Paribas Leasing Solutions are not authorised to provide tax advice. Buyers should consult an accountant in order to understand the tax consequences of any investment decision.