SEPTEMBER 2019 OPINION
A capital idea
Manufacturers looking to grow are able to take better advantage
of capital allowances following a change in regulations
BY JIM LOCKHART, PARTNER, ARMSTRONG WATSON LLP
With the world of
manufacturing changing
rapidly due to fast-improving
technologies and production
techniques, increases in automation and
significant innovation in the sector, there
is a wealth of opportunity to embrace
the advances of the Fourth Industrial
Revolution. The need to innovate and invest
to remain competitive in the UK and on an
international stage is high on the agenda and
the UK tax system has some generous reliefs
to support this.
Capital allowances have been around
for a long time. They are the deduction
that a business receives against its taxable
profits that relate to investment in plant and
machinery for use in the business. These are
very important allowances to make full use
of as the investment required in plant and
machinery can be significant, and if planned
properly can have a positive cash-flow
advantage for the business.
The capital allowances regime has seen
a variety of changes in both the rates that
can be allowed up-front through the Annual
Investment Allowance (AIA), and the rates at
which the remainder of any spend is received
as a tax deduction, known as the ‘writing
down allowance’ (WDA).
The AIA enables a 100% tax deduction to
be obtained on relevant expenditure made
during a year. In the 2018 Autumn Budget
the limit for this was raised from £200,000
to £1 million for two years from 1 January
2019. This means that if expenditure falls
within the right period, up to £1 million can
be claimed as an allowance against taxable
profits, which at current rates can amount to
a reduction in tax of £190,000.
WDAs are available over a much longer
term, with an allowance given each year on
capital expenditure at a rate of either 18% or
6% depending on whether the expenditure is
classed as ‘Plant and Machinery’ or ‘Integral
Features’. Each year the balance to which the
percentage is applied is based upon the cost
less any previous allowances given, known
as the ‘Reducing Balance’ basis. The details
behind this are too technical to cover in
this article, but suffice to say that WDAs are
available to businesses over a much longer
timeframe than AIAs, hence maximising AIA
is most often preferable.
As each manufacturing business will have
differing goals and objectives, one answer
will not suit every company.
There are considerations around the
underlying business such as how much profit
is available to set the losses off against, how
the assets will be paid for and how that
finance is structured, as this may also affect
whether capital allowances are available or
not. Each of these aspects will have an impact
on the business decision as to how and when
to buy the new equipment.
Fundamentally, the investment in new
plant and machinery should be a well
informed business decision that management
must ensure that it aligns with their
overall strategy. The availability of capital
allowances, be that AIA or WDA, is a key part
of that decision-making process, but by no
means the sole driver.
The UK tax system is constantly evolving
and there are currently generous incentives
and reliefs available which are very relevant
to manufacturing and engineering companies.
The current AIA limits are set to encourage
SMEs to invest in new plant and equipment
at a time when technology is changing at a
rapid pace. The Fourth Industrial Revolution
and increases in automation are presenting
manufacturers with the opportunity to
invest in newer, more efficient equipment to
improve production, and the tax system is
providing incentives to do so.
There are further reliefs available
to incentivise companies to invest in
innovation, which is key to growing our
economy. Research & development reliefs
are significant and are available to companies
who develop and improve production
techniques, which almost all manufacturing
companies have to, and that coupled with
clever use of capital allowances can provide
cash resources to grow.
Managers have the opportunity to utilise
the tax reliefs and allowances available to
them to help support investment decisions
in new plant and equipment – and ultimately
encourage company growth – in this fastchanging
environment.
Has your company taken advantage of the changes to the capital allowance rates?
We want to hear from you. Email: chris.beck@markallengroup.com
www.manufacturingmanagement.co.uk 13
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Managers have the
opportunity to utilise the tax
reliefs available to them...”
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