When I buy equipment for my business will it reduce my tax bill? If yes, why doesn’t it show on my accounts?
Firstly, yes buying equipment will reduce your tax bill, however the way it is treated in the accounts is different.
When you buy the equipment, we then look at how long you think you will keep this for and then we spread the cost across the number of years in your P & L (Profit & Loss account). E.g. if you buy a computer worth £1200 that you are going to keep for the next 3 years then we will divide the amount the equipment cost into the amount of years. In this case it is £400 a year into your accounts and a ‘depreciation’ expense, this will reduce your account profit across the 3 years.
However, the tax rules are different. Using the same example above, when we calculate the business’s tax bill the whole £1200 reduces your profit in the year that you bought the equipment. This means that you will receive all the tax relief in one go.
What is the annual investment allowance?
The annual investment allowance (AIA) is a form of tax relief. A limit is set by HMRC for a given period that can be spent on qualifying capital expenditure which is 100% allowable against that year’s taxable profits.
AIA rates have varied significantly over recent years so these should be reviewed periodically to enable more effective tax planning.
If you’d like to know more about annual investment allowance or capital allowances you can read more here https://www.gov.uk/capital-allowances/annual-investment-allowance
Are you thinking of buying some equipment in the next year or so?