Capital allowances rates to be cut
The Emergency Budget presented them as a 'cost' which would enable reductions in the headline rate of corporation tax. But reductions in the rates of capital allowances available will affect all businesses.
Businesses, including unincorporated businesses, will need to take more care than ever to ensure that they make the most of the tax benefits available.
Going down
- Businesses have only recently seen reductions in rates from 25% for all qualifying assets.
- Current rates of capital allowances give tax relief at a rate of 20% a year on the reducing balance for plant and machinery, and 10% on integral assets (ie assets incorporated into buildings) and on cars with high CO2 emissions.
- From April 2012, those rates will reduce again, to 18% for most assets, and to 8% for integral assets and high-emissions cars. (Hybrid rates will apply in respect of accounting periods which straddle the date of the rate changes.)
- No first year allowances will be available for assets acquired after 31 March 2010.
Annual investment allowance (AIA) - going down too
AIA gives 100% relief in the year of expenditure for qualifying plant and machinery. AIA can be claimed against both plant and machinery, and assets incorporated in a building (integral assets) but not against cars (although vans are allowed).
An increase in AIA qualifying expenditure to £100,000 a year (from £50,000), which was announced in the March Budget, was not withdrawn in the Emergency Budget. However, from April 2012, the level of qualifying expenditure will be reduced to a far lower £25,000 limit. From that date only smaller businesses will see a significant benefit from the AIA.
To ensure that you maximise the level of relief available, we advise that you review your plans for any upcoming capital expenditure, in line with commercial and financial constraints, to spread expenditure over the next two years. Any expense in a financial year which exceeds the AIA will only get relief at the (now reduced) rates of capital allowances.
Rewarding environmental improvements
Two classes of asset can give rise to 100% first year allowances in the year of expenditure:
- Energy saving plant and machinery
- Environmentally beneficial plant (in respect of water saving technology).
Strict criteria govern the factors which must be fulfilled in order to qualify for relief. Assets can be granted qualifying status either on a product by product basis, or on the project as a whole. See www.eca.gov.uk for details of individual qualifying products.
In general, qualifying assets arise as part of 'big ticket' projects - the acquisition of a substantial item of equipment for a manufacturing concern, for example, or the move to and fit-out of new premises. It is often worthwhile considering potential claims early in the project to maximise potential relief.
Companies reporting a trading loss due to tax relief from acquisition of environmentally friendly assets, can choose to surrender that loss for a repayable tax credit of 19%. This may give a cashflow advantage, albeit at a lower rate of relief.
No change on short life plant
The rules regarding short life assets - general plant and machinery but excluding cars - have not changed. Where a business acquires plant which it anticipates will have a useful life of less than five years, the asset can be separately identified. When the asset is scrapped or sold within that period, this will give rise to a balancing allowance if sold at less than the tax written down value. Given the far lower rates of relief going forward, this is likely to be of even more benefit in the future. In practice, the most obvious candidate for such a claim is IT and other similar 'high tech' equipment.
But rules for company cars changed last year
A reminder that under new rules, CO2 emissions determine capital allowances for cars acquired from April 2009. Cars with emissions under 160g/km are now allocated to the main 20% (18% from 2012) pool, whereas cars with higher emissions are allocated to the 10% (8%) pool.
In many circumstances it may now be more tax efficient to provide company cars through mechanisms such as finance leasing arrangements. Under a finance lease, the expense incurred is deductible, subject to a restriction of 15% for high emission cars. Such a policy needs to be considered with the overall cost of providing the vehicle in mind.
One matter that should also be considered is the personal tax consequences for any individual to whom a vehicle is provided. The car benefit charge from a benefits in kind position can be significant. Considered together with these changes to capital allowances, employers may be minded to review the overall salary package of employees.
If you are considering any significant capital expenditure please speak to your usual Littlejohn tax advisor to ensure you receive your claim in full, or contact Chris Riley on 020 7516 2427 or email criley@littlejohnllp.com
