Answer: Probably nothing, maybe something, but it depends on your profit level.
(Please note that this article is aimed at businesses with profits below £250,000 and calculations and examples are made on that basis. If your profit exceeds £250,000, (a) congratulations, you're doing well, and (b) please contact us for more specific advice)
First of all, be careful you don't let the tail wag the dog. In this article, we're going to discuss capital expenditure (CapEx) and the tax relief available. But there's no sense in spending money you don't need to. However, if there's a need for the capital item, and it's in the CapEx budget for the next couple of years, then the timing of the purchase could be important.
What is the Annual Investment Allowance (AIA) and the Super Deduction?
The AIA is the mechanism by which you get tax relief on the purchase of qualifying capital expenditure (CapEx) such as plant, machinery, certain vehicles, computer equipment etc. For every £1 spent, your taxable profits are reduced by £1.
So, if your profits before the qualifying CapEx is £120,000 and you spend £50,000, your taxable profits will be reduced to £70,000.
The Super Deduction, introduced to stimulate growth post-Covid, allows businesses to claim 130% of their costs against their profits. So, for every £1 spent, profits are reduced by £1.30. In the example above, the business would be able to claim £65,000 capital allowances (£50,000 X 130%), reducing taxable profits to £55,000.
So, what should I do?
The timing of the change to the corporation tax rates and the withdrawal of the super deduction means we need to be a little careful with the timing. There are three scenarios:
- Profit is below £50,000 regardless of expenditure
- Profit is above £50,000 regardless of expenditure
- Profit is above £50,000 but the CapEx will bring it below
Profits below £50,000
Because profits below £50,000 will be taxed at 19% both before and after April 2023, it will be more tax efficient to make the CapEx investment before April 2023:
£20,000 CapEx investment
Tax saved pre April 2023 = £20,000 X 130% X 19% = £4,940
Tax saved post April 2023 = £20,000 X 100% X 19% = £3,800
Outcome: significantly better to accelerate Cap Ex
Profits above £50,000
After April 2023, profits above £50,000 will be taxed at 26.5% compared to 19% beforehand, so we need to take that into account:
£50,000 Cap Ex investment
Tax saved pre April 2023 = £50,000 X 130% X 19% = £12,350
Tax saved post April 2023 = £50,000 X 100% X 26.5% = £13,250
Outcome: marginally better to delay CapEx
Profits straddling £50,000
This is where things get a little more complicated. As we've seen above, spending £50k on CapEx before next April will save £12,350 regardless of profit levels. However, if, initially your profit is £70,000, after April 2023, some of this is taxed at 19% and some at 26.5%, but if you make the CapEx, this will bring profits down to £20,000, all of which will be taxed at 19%.
£50,000 CapEx investment
Tax saved pre April 2023 = £50,000 X 130% X 19% = £12,350
Tax saved post April 2023 = (calculation is a little more complicated) = £14,800
Outcome: significantly better to delay CapEx
Other things to consider
- As said above, don't let the tax tail wag the business dog. If you absolutely, really need the kit, and it will negatively affect business if you delay, the obviously you would want to time the purchase according to business need, rather than for tax reasons.
- Equally, if, by accelerating the purchase, the cash flow of business is going to be put under stress, then that is unlikely to be financially prudent.
- You'll also want to consider the impact the disposal of the assets you are replacing will have on your profits.
- If you need to finance the purchase, you'll want to check whether interest rates tare likely to rise or fall between now and April 2023.
- Of course, if this is timed carefully, then it may only be a matter of a day or two's delay or acceleration so these things may only be of minor consideration.
- The super deduction is only available to incorporated companies. Sole traders and partnerships who are considering major CapEx investment might want to consider incorporating.
- If a company's financial year end straddles 1 April 2023, an apportionment must be made which will affect calculations.
So, as with most tax related matters, it's much more nuanced than on first appearance. We recommend, of course, seeking our relevant professional advice if you have any doubts.
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