If there is one constant in this world it is change, and there have been lots of tax and legislative changes recently that affect the UK construction industry and its civil engineering contractors.
These include changes recently announced to the Carbon Reduction Commitment Energy Efficiency Scheme and future carbon taxation, as well as the new Tier 4 engine legislation, which will impact new plant sales from January 2011.
Complying with carbon and sustainability legislation will cost money and require substantial investment at a time when the recent upheaval within the finance sector has reduced the number of lenders willing to lend to the construction industry. So what opportunities are still available to businesses that wish to invest in new plant whilst maximising tax relief, maintaining cash flow and preserving vital working capital?
One vital finance tool that can achieve these aims is a simple fixed rate Hire Purchase agreement that will lock in to today’s historically low interest rates whilst being treated by HM Revenue and Customs (HMRC) as a cash purchase. Whether paying cash or using Hire Purchase, the Annual Investment Allowance (AIA) is designed to encourage new investment on new or used plant and machinery (not cars) against taxable profits in the year in which the qualifying expenditure was made.
“Annual Investment Allowance (AIA) is designed to encourage new investment on new or used plant and machinery”
Until April 2012 the first £100,000 of investment is 100% allowable against tax, with any excess attracting the Writing Down Allowance (WDA) of 20% in the first year, and the balance going into the pool of allowances for subsequent years. However, the clock is ticking, because from April 2012 the AIA will fall to £25,000 and the WDA will fall to 18%. Hence it will take even longer to write off plant against tax.
If a business is contemplating buying the latest fuel – and emissions efficient plant in the Spring of 2011, acquiring some of it just before April and some just after could result in £200,000 being written off against taxable profits in little over a year.
Not only that, but the interest charged is also 100% tax deductable, and cash flow will have been managed in an exemplary fashion – claiming the maximum tax relief but with an outlay of little over a third of the actual capital cost in each respective tax year.
Given the right tax scenario, the benefit of the current AIA is equivalent to HMRC paying the deposit and the first year’s finance payments on a three-year Hire Purchase agreement.
- Nigel Greenaway is general manager, marketing, for JCB Finance. JCB Finance is not a financial advisor. Always seek advice from your accountant or finance director, because circumstances are different for every business, with different financial year ends, tax rates and income and expenditure patterns.