Many businesses, especially small and medium-sized ones, can claim tax relief for equipment for the financial period in which they buy it. However, you can still speed up relief if you buy at the right time. How is it done?

The annual investment allowance

Since 1 January 2016 the annual investment allowance (AIA) has been a permanent tax break. For most small and medium-sized businesses that means claiming a tax deduction, as a capital allowance (CA), for the full cost of equipment (up to £200,000 per annum from 1 January 2021 and £1 million until then) in the financial period in which it’s purchased rather than it being spread over many years. The trouble is there are situations where the timing of a purchase can delay the tax deduction.

Deferred payment = delayed tax relief

A special rule applies where payment for equipment isn’t required immediately by the seller. It means you can only claim CAs, including AIAs, for goods once they belong to you. Normally this doesn’t pose a problem because ownership of the goods starts from the time there’s an unconditional obligation to pay for them, and typically the date of the invoice or purchase order creates that obligation, but not always. For example, in the case of a hire purchase, ownership doesn’t pass to the buyer until the end of the contract, consequently CAs can be delayed.

Trap. Where the purchase agreement allows for all or part of the cost to be paid later than four months after the purchase becomes unconditional, i.e. when you’re legally committed to go through with it, CAs can only be claimed for the financial year in which the equipment is put to use in your business.

Example. Acom’s accounting year end is 31 December. On 1 December 2020 it commits to buying a bespoke IT system. The purchase contract requires Acom to pay £5,000 at the time of the order and the balance of £30,000 when the system has been installed. The installation is completed on 30 April 2021. Acom can claim CAs of £5,000 in its financial year to 31 December 2020, but must wait until the next year to claim for the £30,000.

Tip 1. When agreeing terms for large purchases of equipment near the end of a financial year, keep in mind the four-month rule. If the timing of payment is going to cause CAs to be pushed into the next financial year, consider asking the supplier, say in the purchase agreement, that payment is required within four months irrespective of the delivery date. Even if payment is made later than this, CAs can be claimed in the financial period in which the purchase contract is signed.

Tip 2. If Tip 1 isn’t possible, plan purchases that involve payments falling more than four months after you’ve committed to buy so the equipment is delivered and put to use in your business within the same financial year. In other words, avoid making this type of purchase close to your financial year end.

Tip 3. If Tips 1 and 2 aren’t feasible, simply paying for the equipment earlier than the supplier requires can ensure you obtain CAs in the corresponding financial year.


The key message is that planning your purchases of equipment around the tax rules is important. It can ensure you receive the earliest possible tax relief and therefore also improve your cash flow.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.