The End of the Tax Year is Imminent...Refurb or Replace?

The end of the 2022/23 tax year is imminent, with the 5th April being less than a month away.

One of the challenges I hear our machinery sales team come up against is the advantage of reducing a tax bill by refurbing an existing machine rather than investing in a replacement, whether that be new or used.

Why is this?

Normally, repair or refurbishment of an existing piece of equipment would be considered a repair and renewal overhead expense. Reducing the net profit on which tax is calculated.

Whereas, an investment in new or used equipment goes on to the balance sheet with only a small amount of depreciation appearing on the profit or loss statement, which is reduces the net profit.

But there are capital allowances available to you, these work by reducing the net profit and thereby the tax to be paid.

Annual Investment Allowance (AIA)

This is the most common one – this allows 100% of spend on purchasing new or used plant or equipment to be deducted against the tax calculated on your net profit.

There are some things to note though:

• You cannot claim on business cars.
• Items owned before they came into use in the business.
• Items given to you or your business.

There is a limit on the amount you can claim, this is currently at £1 million pounds of qualifying purchases (doesn’t have to be a single piece of plant or equipment, you can include numerous up to the £1 million pound limit).

Here’s some good news for you – originally the £1 million pound level was introduced to assist business investment during the Covid-19 pandemic and was originally due to revert back to the original £200,000 from 1st April 2023. But the government, in the last budget, announced that the £1 million level would continue permanently!

You do also need to bear in mind, should you sell the asset after you have claimed AIA on it, there will be a tax liability to pay.

Practical example:

• Net profit = £50,000 the tax to be paid to HMRC is calculated on this.
• But during the year your bought a lovely used Proforge Inverta 5m at £25,000. You decide to use the £1 million AIA available to you and claim the £25,000 against your net profit, rather than writing it down with depreciation over a number of years.
• Your net taxable profits are now £25,000.

But that’s not all … if you’re a Limited Company there is currently the Super Deduction available for a limited time only!!!

Again, introduced by the government during the pandemic it was another incentive for business investment. Sadly, unlike AIA it hasn’t been made a permanent capital allowance and will finish on the 31st March 2023.

The super deduction allows a Limited Company to deduct 130% of the cost of a new piece of plant or equipment against their taxable net profit. The emphasis there being new equipment only.

Practical example:

• Net profit = £250,000 the corporation tax due to HMRC will be calculated on this
• During the year the company invested in some new plant:
  • The newly launched Moore Unidrill 2.5m Direct Drill @ £26,925
  • And a in stock Proforge Inverta 6m Trailed with front hyd levelling boards @ £35,595
  • Total investment £62,520
• You use the Super Deduction to reduce your net taxable profit by £62,520 x 130% = £81,276
• Your net taxable profits are now £168,724

Again, should you sell the asset after you’ve claimed Super Deduction, there may be a tax liability due to HMRC.

Also available to Limited companies is an additional Capital Allowance, 50% first year allowance for special rate assets.

So, replacement over refurbishment can be a winner when it comes to the tax bill too!

Finally – remember those deadlines!

• Annual Investment Allowance - £1,000,000 is available on qualifying asset spend to the 5th April 2023. Allowance will renew 6th April for the 2023/24 tax year.
• Super Deduction – 130% will cease to be available on qualifying asset spend after 31st March 2023!
• 50% First Year Allowance – again, ceases to be available on qualifying asset spend after 31st March 2023!

Please do seek independent advice from your accountant or tax adviser though, they will have the relevant information to you and your business.

Victoria Wolfe, AATQB Finance Manager Agri-Linc Limited

Here are some useful links:

Click here for the UK Government web page on AIA.

Click here for the UK Government Super Deduction Factsheet.

Click here to view the Proforge Inverta 6m

Click here to view the Moore Unidrill 2.5m Direct Drill, New Model

The information provided in this article is without liability to Agri-Linc Holdings Limited, it’s associated companies and subsidiaries, it’s directors, employees or sub-contractors. Please seek independent advice of your own before making decisions based on the contents of this article.