Construction equipment manufacturers are warning contractors that the deadline is looming to take advance of 100% tax allowances on plant, which fall from £100,000 of purchases to just £25,000 from April.
Annual plant and machinery writing down allowances will also reduce from 20% to 18%.
The changes to the Annual Investment Allowance will wipe out significant savings for contractors when they buy new plant.
While the changes to AIA and Writing Down Allowances do not come into force until 6 April, the industry has warned against complacency.
Nigel Greenaway, marketing general manager at JCB Finance, said: “Contractors need to be aware that the allowance applies only to delivered machines that are in operation by the deadline.
“With the Christmas slowdown looming and lead times on new equipment lengthening, it is vitally important that contractors realise new orders have to be placed as soon as possible. If not firms could find themselves tens of thousands of pounds out of pocket.”
A small plant or civils business potentially facing a £40,000 tax bill could write it off to zero if it were to buy and take delivery of two backhoes before 6 April 2012.
The AIA is designed to encourage new investment on new or used plant and machinery against taxable profits in the year in which the qualifying expenditure was made.
The rules apply to all businesses from sole traders to large limited companies and even plant hirers offering non-operated plant.
Tax allowance scenario
Frank is a sole-trader and an owner-operator with a couple of backhoes.
He and his son dabble in property development, usually only one property at a time but thankfully his minimal exposure to the vagaries of the recent housing market have allowed him to ride out the property crash.
He managed to sell his property at a time when the market had experienced a full quarter of price rises so he has made a healthy profit. However, Frank is rapidly approaching the end of his tax year and his accountant is warning him that he is struggling to reduce his taxable profits and that a big income tax bill is looming.
Even after claiming business expenses plus his personal tax allowance and a salary taxed at 20%, a profit of £100,000 remains which will attract the higher rate of 40% income tax.
This has all been caused by the profit on the sale of the last property which has not been reinvested in a new property and could result in an additional tax bill of £40,000. All is not lost because Frank’s accountant is well up to speed with the latest changes in taxation.
If Frank invests in new replacement plant, financing it over his usual three year period, then he could avoid paying any tax at the 40% rate by claiming the maximum AIA. Frank decides to invest in new plant and takes advantage of a 0% finance 3-year hire purchase offer.
Upon further investigation his accountant calculates that paying a 10% deposit (£10,000) and borrowing £90,000 at 0% over three years equates to a £40,000 outlay in the first year, followed by £30,000 in each subsequent year.
The £40,000 expenditure in the first year equals the £40,000 tax bill saved so it is not too far from the truth to state that HM Revenue & Customs has paid the equivalent of Frank’s deposit and his first year’s HP payments.
Not only that, but Frank has managed his cash flow well – claiming the maximum £100,000 AIA but with an outlay of only £40,000 in the same tax year.
Pre April 2012
100% AIA: £100,000
20% WDA: N/A
Tax Bill: Zero
Post 6 April
25% AIA: £25,000
18% WDA £13,500
Tax Bill £24,600