Unless your business’s capital expenditure on plant and machinery falls within the Annual Investment Allowance (‘AIA’) limit for the period in which it is acquired (currently £200,000 per annum from 1 January 2016), tax relief will be obtained through claiming capital allowances.
At the current 18% rate of main pool writing down allowances it takes eight years to relieve 80% of the expenditure incurred, even if the asset has been sold at a loss or scrapped within that period.
A Short Life Asset (‘SLA’) election can provide a tax efficient opportunity to accelerate relief for certain items of capital expenditure.
If a business elects for plant or machinery to be treated as a SLA, capital allowances are calculated individually on the asset over an eight year period. This ensures that, if the asset is sold or scrapped within that eight year period, the total allowances given equal the actual net cost of the asset to the business.
A SLA election will therefore be beneficial if the asset depreciates faster than the rate at which capital allowances are given and it is likely to be sold or scrapped within the eight year period.
Example
A company acquires new computer equipment for use in its business for £250,000 but anticipates replacing this after three years, when the likely disposal proceeds will be only £20,000. If the company has already utilised its AIA it may wish to consider making SLA elections on the computer equipment:
Without an SLA election:
Capital allowances of £112,158 would have already been claimed in the first three accounting periods, leaving £117,842 (i.e. £137,842 less £20,000 sales proceeds) still to be tax relieved at 18% per annum (on a reducing balance basis) going forward. So, despite the asset having been sold, relief for its cost to the business would only be obtained as capital allowances were claimed in subsequent years.
With an SLA election:
Again, capital allowances of £112,158 already been tax relieved, but tax relief for the balance of £117,842 would be accelerated to be fully relieved (as a ‘balancing allowance’) in the period of disposal. This additional relief would result in a corporation tax saving of £22,390 in the year of disposal (assuming a 19% rate of corporation tax).
It’s not necessary for an asset subject to a SLA election to have (or be expected to have) a ‘short life’ and if the asset is not sold or scrapped within the eight year cut-off period, then the unrelieved expenditure simply transfers to the main pool, and nothing would have been lost.
An election would need to be made for corporation tax purposes within two years of the end of the period in which the expenditure is incurred. For income tax the time limit is normally the anniversary of the 31 January following the tax year in which the expenditure is incurred.
Care should however be taken before making a SLA election. If an election is made but the asset is ultimately be disposed of for an amount in excess of its Tax Written Down Value (the amount on which capital allowances have not yet been claimed), a ‘balancing charge’ will arise, advancing the timing of tax on the disposal profits such that the election would be disadvantageous. There are also exceptions to SLA treatment including most cars, ‘long-life assets’ (assets with a useful economic life of at least 25 years) and ‘integral features’ of a building or structure.
Opportunities to consider SLA elections will however exist for most businesses incurring capital expenditure in excess of the AIA, particularly in relation to assets such as computer and IT equipment, which often has a limited useful economic life and a low residual value.
Tom Roseff is a tax partner in Armstrong Watson’s Leeds office and specialises in advising entrepreneurial and family-owned businesses and their owners. Tom can be contacted on 0113 2211 362 or by email at tom.roseff@armstrongwatson.co.uk.
For more information on Short Life Asset elections for your business
