Accelerated tax relief for enhancing old machinery
Accelerated tax relief for enhancing old machinery
Your company has spent considerable sums renovating its machinery. The good news is that recent changes to HMRC practice mean that this qualifies for accelerated tax relief. There are two options for claiming, what are they and how do they differ?
Plant and machinery
As you're probably aware, tax relief for the cost of equipment (plant and machinery (P&M)) is allowed in the form of capital allowances (CAs). This includes so-called "full expensing", which allows companies to claim CAs equal to 100% (50% for some types of P&M) of the cost in the year of purchase (see Further information). There's no cap on expenditure that can qualify for full expensing but the drawback is that it can only be claimed for purchases of new and unused P&M. Plus, there's a clawback of tax relief when P&M is sold or transferred.
Tip. The annual investment allowance (AIA) allows relief for 100% of the cost for the year of purchase, even for second-hand items.
New P&M from old
HMRC recently amended its guidance on whether upgrades to existing P&M qualify for full expensing. The cost of new parts either added to an existing asset or used in combination with used parts to create a new item of P&M is eligible. A recycled asset, which results from an existing asset being broken down and reformed, will wholly qualify as unused.
Tip. Look back at your accounts for the previous two financial years to check and claim full expensing CAs if it hasn't been claimed for upgrades to P&M.
Example. Acom Ltd operates a large textile loom as part of its fabric business. On 1 April 2025 it installs new beams and shuttles to improve efficiency. As new parts are added with the objective of improving the existing machine's functionality, their cost qualifies for a 100% first-year allowance.
Sale or transfer
Unfortunately, the benefits of full expensing are clawed back as a "balancing charge" when P&M is sold or transferred. The balancing charge is equal to the amount of CAs claimed as full expensing.
Example. Acom, which pays corporation tax (CT) at 25%, sells P&M that it bought for £300,000 18 months ago and for which it claimed full expensing CAs. If the proceeds of sale are £100,000, this results in a balancing charge for the same amount and so increases Acom's CT bill by £25,000 (£100,000 x 25% CT).
AIA v full expensing
If you expect to sell P&M within a relatively short time after purchase, it's better to claim the AIA rather than full expensing as the clawback of tax relief is spread over many years instead of all at once. This works by reducing the value of other P&M for which CAs can be claimed.
Example. Assuming the same facts as the previous example, except that Acom has claimed the AIA for the £300,000 instead of full expensing, when the P&M is sold there's no balancing charge as long as Acom has other expenditure on which it can claim CAs. Say the value of its other qualifying P&M is £120,000, this is reduced by the £100,000 proceeds. The effect is to reduce Acom's CAs for the year by just £18,000, i.e. 100,000 x 18% (which is the normal annual rate at which CAs are allowed). This increases Acom's CT bill by £4,500 (£18,000 x 25% CT) compared with the £25,000 resulting from the full expensing balancing charge.
"Full expensing" offers accelerated tax relief for the cost of equipment. HMRC's latest guidance widens the circumstances where full expensing can be claimed. However, a rapid clawback of tax relief can result when the equipment is sold or transferred. To prevent this consider claiming the annual investment allowance instead of full expensing.