Capital allowances and partnerships

HMRC recently updated their guidance on capital allowances and how to ensure relief is claimed correctly.

The material published by HMRC is broad and covers areas such as the annual investment allowance (AIA), plant and machinery claims, record keeping and ways to correct any errors with previous claims.

Professional firms should ensure claims are made correctly so that misstatements are avoided and available tax relief is maximised.

Common errors

HMRC have stated the majority of errors relate to assumptions being made rather than the facts being checked before tax relief is claimed.

Taxpayers must take reasonable care to ensure that any claim is correct by verifying the relevant information. This could involve confirming the date of acquisition and cost of the asset or determining whether the asset will be used wholly for the qualifying activity of the business.

Annual Investment Allowance (AIA)

This is a specific area highlighted by the HMRC release.

The limit for AIA is now permanently £1 million and enables businesses to claim 100% first year allowances on qualifying plant and machinery and special rate pool additions.

Key points to highlight: 

• Mixed partnerships with a non-individual member, i.e. a corporate member, an LLP, a Trust, are specifically not permitted to claim AIA. 
• One AIA is available per group under common control as defined by company law (e.g. by control of voting rights) and also companies / partnerships / LLPs under common control (i.e. not in a group but owned by the same individual) if they are related. The AIA can be shared amongst the group entities, but it cannot exceed £1 million per accounting year. 
• AIA is specifically not available for the purchase of motor vehicles.

The date in which expenditure is deemed to be incurred

This area may appear to be a matter of timing and not a material issue, however it is very important to ensure this is correct and depending on the circumstances of the business and the level of profits, a claim for AIA or changes in tax rates/thresholds this could have a tax liability impact.

The date in which expenditure is incurred is usually the date in which payment for the asset becomes unconditional however there are specific rules where the length of time between delivery of the asset and payment exceeds four months and also where stage payments are made for an asset under construction i.e. a milestone contract.

Milestone contracts can typically involve building projects which is in itself a difficult area to analyse whether specific elements are eligible for tax relief and at which rate as plant and machinery allowances, integral features, revenue expenditure or structures and buildings allowances (SBAs).

The interaction of income tax and corporation tax basis for partnerships

A further complication in relation to a capital allowance claim made by a mixed partnership (say with both a corporate and an individual member) is that both income tax and corporate tax legislation must be considered.

Full expensing enables a business to claim 100% on qualifying plant and machinery and 50% first year allowances on qualifying special rate expenditure for assets acquired after 1 April 2023.

This is only available to corporates and as such two capital allowance computations should be completed, one under the income tax rules and the other under the corporate tax rules. Full expensing could make a significant difference to the taxable profit allocated to the corporate member.

It is essential that good record keeping is maintained to correctly make a claim for this additional tax relief. This is because the tax written down values will never align under the income and corporate tax basis when being carried forward and full expensing has the potential for large balancing charges if proceeds are received on the disposal.

Good record keeping and best practice with regard to claims

It is fundamental that an itemised record is kept of all assets for which a claim for capital allowances has been made. This needs to include information such as the date of acquisition, initial cost, tax written down value and the claim made for the asset.

Good record keeping is important to ensure that any balancing allowances or charges are dealt with correctly when an asset is disposed of.

It is best practice to include any capital allowance workings within the tax computation as an attachment to the annual tax return. If the working papers are detailed this should limit questions regarding the application of the relief from HMRC and help to avoid costly professional enquiry responses.

How can Crowe help?

We have a market leading team of specialised tax advisors with knowledge and experience in completing timely and efficient capital allowance claims. We consider the commercial objectives of the business and ensure that the maximum tax relief available is obtained. We can assist at the planning, calculation and review stages of a capital expenditure project.

For further information, please contact Nicky Owen or your usual Crowe contact.