Capital spend timing: accelerate, defer, or wait?

1. Your tax rate decides the saving

Corporation Tax is not a flat rate. For the financial year starting 1 April 2023 onwards, the small profits rate of 19% applies to profits up to £50,000, the main rate of 25% applies above £250,000, and marginal relief operates in between with an effective rate of 26.5% on profits in the £50,000 to £250,000 band. The thresholds are divided across associated companies.

A £1 deduction against profit taxed at 19% saves 19p of tax. The same £1 against profit at 26.5% saves 26.5p. If the company expects to be in a higher rate band next year than this year, deferring a deduction saves real money. If the reverse is true, accelerating it does. The rate position is the single biggest lever in capital spend timing.

2. Full Expensing vs AIA

Full Expensing gives a 100% first-year deduction on qualifying new main-rate plant and machinery, unlimited, available only to companies. The Annual Investment Allowance gives a 100% first-year deduction on plant and machinery (new or used) up to £1 million a year, available to companies, partnerships and sole traders.

For most SMEs below the £1 million annual cap, AIA does the same work as Full Expensing and includes used kit. Full Expensing only matters where the company is spending more than £1 million, or where AIA headroom has already been used, or where the asset is new and main-rate and the taxpayer wants the certainty of the Full Expensing regime.

For special-rate pool items (integral features, long-life assets) the company has the 50% first-year allowance under Full Expensing, or the normal writing-down rate at 6%. Special-rate items cannot claim AIA at 100% above the AIA cap, the split between main-rate and special-rate pool matters for the timing question.

3. Which period gets the deduction?

The normal timing rule is when the obligation to pay becomes unconditional, subject to special rules for deferred payments and other arrangements. Ownership and the purpose of the expenditure also matter. First use is not the universal trigger for an outright purchase.

For hire purchase, bringing the asset into use allows the outstanding capital payments to be treated as incurred. Check the contract, delivery, ownership and payment terms before deciding which period gets the claim. An invoice date or first drive alone does not settle every case.

4. Splitting a Large Purchase

For a purchase above the £1 million AIA cap in a company that does not expect Full Expensing eligibility (second-hand, or not main-rate), splitting the order across two accounting periods can preserve 100% relief on the whole amount. Two orders of £800,000 in consecutive years each get full AIA; one order of £1.6 million in a single year gets AIA on £1m and writing-down allowances on £600,000 at 14% main rate or 6% special rate.

The split has to be genuine, two separate purchases, two separate invoices, qualifying expenditure incurred in the separate periods. A single contract split into two instalments for invoice purposes does not work; HMRC looks at substance. Where Full Expensing is available (new, main-rate, company) the £1m cap does not bite and splitting is unnecessary.

5. Finance: HP vs Lease vs Cash

How the purchase is financed changes the tax treatment. Hire purchase and cash purchases both qualify for capital allowances in the period the qualifying expenditure is incurred, the financing cost is deductible separately. Operating leases (where the risk and reward sit with the lessor) do not attract capital allowances for the lessee; the lease rentals are deductible as incurred.

For a company at the marginal rate, accelerating a £60,000 HP purchase into this year gives a £60,000 deduction now (saving up to £15,900 at 26.5%). Taking the same asset on operating lease spreads the deduction across the lease term. The two are not equivalent. Which is better depends on cashflow, rate expectations in future years, and what happens to the asset at the end.

6. The Decision Model

A capital spend timing decision reduces to four inputs: the expected CT rate this year and next, the AIA and Full Expensing headroom this year, the date the expenditure is treated as incurred, including any hire-purchase use condition, and the cashflow consequence (the company needs the cash to make the purchase without straining working capital).

Model those four inputs for both dates, pick the one with the higher after-tax outcome that the business can execute, and write down the decision in a dated file note. The work is not complicated. What fails is the execution: the asset that was "going to be ordered" and slipped into the next period unnecessarily.