There is often confusion about purchasing an asset and the tax implications surrounding it so I thought I would blog here the relevant information to clear up some myths.
An asset in a business could be computer equipment, plant and machinery, a car, fixtures and fittings such as office furniture. Basically, big stuff.
It used to be the case that when you purchased an asset you didn’t get the tax relief on it straight away. You would get it over a period of years, usually 4+. These rules changed a few years ago. Now, you get the tax relief straight away at the time of purchase.
The tax relief works like this. Suppose I want to buy a new computer for £1,000. I buy the computer in February 2012 and my year end is March 2012. In my accounts for the year ended 31 March 2012, the new computer will go on my balance sheet as an asset and it will be depreciated (the cost written off against the profit of the company) over the next 3 years. However, when we come to calculate the corporation tax, the computer will be written off completely. 100% of the cost will go against profit, and when you have a cost of £1,000 going against your profit you will receive £200 of tax relief. That’s because corporation tax is 20% and your tax bill will go down by 20% of £1,000, which is £200.
So another way of looking at it, is that the computer costs £800 (£1,000 minus the tax relief of £200), although you pay £1,000 in February and don’t actually get the tax relief until when you pay the corporation tax which is always nine months and one day after the year end, in this case the year end is 31 March 2012 so the tax payment date is 1 January 2013.
One last thing to remember, is that you only get 100% tax relief on asset purchases up to the value of £25,000. Any higher, you are back into the tax relief being spread over a number of years.
So if you waited until April to buy the computer rather than buy it in February, you would still get the tax relief but it wouldn’t actually take effect until 1 January 2014, because the cost would go into the accounts for the year end 31 March 2013. So if you are planning to buy an asset, it makes sense to buy it before the year end so that you can get the tax relief sooner.
