Accelerate tax relief for the cost of equipment
You’re upgrading your company’s IT equipment as it’s now several years old. Naturally your company will get tax relief for the purchases but what’s the tax position if you sell or scrap the old equipment, and how might you improve it?
One man’s trash
You want to do your bit for the planet so instead of taking it to the tip, you’re going to sell the old IT equipment to a recycling firm. They will not only pay you a small fee for the goods, but they will also wipe all data from the laptops and refurbish them to make sure they don’t end up in landfill. You’ve done a good deed and made a few quid in the process, but what are the tax consequences?
Tax consequences
If tax relief in the form of capital allowances (CAs) were claimed for the equipment the sale proceeds must be taken into account. Usually, this involves deducting them from the net running total of expenditure on equipment less the cumulative CAs claimed. This is known as the main rate CAs pool.
Example. At the end of Acom Ltd’s financial year ended 31 March 2024 the value of its main rate pool was £20,000. In the next financial year it doesn’t purchase any items that affect the pool, but it sells one of its old machines for £1,000. This reduces the £20,000 pool so that in the year ended 31 March 2025 Acom is only entitled to claim CAs on £19,000. Acom can claim CAs equal to 18% of this amount, i.e. £3,420.
Depending on the type of equipment and from whom it was acquired Acom could have increased its CAs claim for the year to 31 March 2025 had it made a short life asset (SLA) election for the equipment it sold.
CAs planning
An SLA election can reduce the time it takes to get full tax relief for the cost of equipment. It works by giving each item of equipment its own CAs pool instead of being included in the main rate pool. When the equipment is sold or no longer used in the business, CAs are given for the value of the asset for which CAs haven’t been claimed. This is called a balancing allowance.
Example. The same facts as above but an SLA election was made for the item of equipment that was sold. It was purchased in Acom’s financial year to 31 March 2023 for £9,000. CAs at the main rate of 18% were claimed for that and the following financial year meaning that the SLA pool was £6,052 at the start of the 2025 financial year. From this the £1,000 sale proceeds are deducted leaving a balance of £5,052. This is a balancing allowance Acom can claim in addition to the CAs it can claim on the value of its main rate pool. For the year to 1 March 2025 Acom’s CAs more than double from £3,420 to £7,032.
Short life practical issues
SLA elections are advantageous for equipment that you don’t expect to use in your business for more than seven years and where you didn’t claim CAs for 100% of its cost for the financial period in which it was acquired, e.g. where the equipment was bought or transferred from a connected person, e.g. a predecessor business or a company in the same corporate group. You can make an election up to two years from the end of the financial period in which you acquired it..
To simplify admin, similar items of equipment can be grouped and covered by a single election.
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