Tax relief when purchasing new equipment

Question from Toby Prescott, via e-mail:
I am self-employed and understand that there is some ‘additional relief’ available if I purchase some new machinery or equipment for my business. Is this the case and if so how does it work?

Answer from Graham Booth, senior accountant at Easy Accountancy:
There is indeed some ”additional relief” available for such expenditure in the form of increased Capital Allowances in the earlier period. Capital Allowances are the tax relief given when you purchase an item considered ”Capital”, for example a builder purchasing a trailer for a van.

The trailer may last longer than a year so the tax relief is spread over a longer period of time, perhaps three or four years. Therefore in each year the tax relief will amount to say 20 – 25%. In other words your tax relief is spread over future periods. Since April 1, 2008 if you invested in some qualifying capital expenditure such as business machinery or equipment you are able to get 100% relief of the amount paid in the first year, (up to a limit of £50k).

In addition, if the expenditure is in excess of £50k, say for example a printing firm purchasing a new press, not only will they be able to claim 100% relief in the first year on the first £50k, they will also get 40% on any amount above 50k for the first year rather than the usual 20%.

This 40% first year allowance, (FYA), is only available for a one year period from April 1, 2009 (Companies) and April 6, 2009 (Self-employed). The enhanced First Year Allowances mean that you get your tax relief a lot sooner that you would have previously. The overall idea is to hopefully encourage and stimulate investment by businesses.

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