The Chancellor’s Pre-Budget Report in October of last year announced major changes to the way businesses can claim relief for capital expenditure.
The headline news was the scrapping of Industrial Building Allowances, which allowed you to write off the cost of constructing industrial buildings (and hotels and agricultural buildings) over a 25 year period. Particularly vicious was the way this applied to expenditure already incurred, so that entrepreneurs who have already spent very large sums in the expectation of getting these tax allowances will have to deal with a severe blow to their cash flow forecasts as a result of the loss of this important tax relief.
This article, however, concentrates on the changes to the allowances for expenditure on plant and machinery. Broadly speaking, they are good news for smaller businesses, and bad news for larger ones – the cut-off point is at around £130,000 of annual capital spending on plant, with those over that level finding that they will have to wait longer to get tax relief on their expenditure, and those below it getting their relief earlier.
The Old Rules
Before the changes were announced, expenditure on plant and machinery was the subject of two types of allowance – First Year Allowances and Writing Down Allowances (“FYA” and “WDA”).
A “small business” could claim FYA at 50% on its expenditure in the year, and a “medium sized business” could claim 40%. The balance of the expenditure was carried forward and attracted an annual WDA of 25% in the following years. If a “small business” spent £50,000 on a new piece of machinery, therefore, in the first year it could claim 50% (£25,000) FYA, and in the following year, WDA at 25% on the balance (£25,000 times 25% = £6,250).
Long Life Assets
Certain types of plant are categorised as “long life assets” if they have an expected useful life of 25 years or more, and the WDA on these was lower at 6%. “Long Life Assets” are quite rare, but the oil industry has many of them, and given the threats to move their HQs out of the UK made to the Chancellor last year by the big oil companies, it was not very surprising that the WDA for such assets was increased to 10% from April 2008.
The New Rules
For expenditure incurred after 5 April 2008 (31 March 2008 for companies) the FYA is scrapped, and the WDA is reduced to 20%.
The Annual Investment Allowance (“AIA”)
Instead of FYA, a business will have an AIA of £50,000, on which it can claim 100% relief. Any expenditure over £50,000 will be the subject of a WDA of 20%, so if the business spends £100,000 on plant in an accounting period, it will get an AIA of £50,000, and £10,000 WDA on the balance. Compared with a FYA of £50,000 under the old rules (with no WDA until the next year), this is an improvement.
In the case of a group of companies, or “related businesses” (we look forward to hearing exactly what this means!), there is only one AIA of £50,000, and the taxpayer can allocate it as they wish between the various companies in the group.
For a number of years, there have been heated disputes between HMRC and taxpayers as to exactly what is plant (qualifying for FYA and WDA) and what is a part of the building itself (qualifying for either nothing or industrial buildings allowance at 4% in some cases).
From April 2008, we have a new category of “integral” plant. This is plant that forms part of a building. Such plant will attract a WDA of 10%.
In some cases, this is good news – for example, the electrical wiring of a building was not plant or machinery under the old rules unless you could make a case that it was a specialised installation to meet the needs of specific plant installed in the building. From April 2008, it will be “integral” plant, and will attract WDA at 10%.
In other cases, it is bad news – space or water heating systems currently qualify for FYA (and WDA at 25% on the balance), but from April they too will be “integral” and only attract 10%.
In a few cases, the new rules are quite mysterious – “active facades” will be “integral” and get the 10% WDA. Frankly, I have no idea what an “active facade” is but my Senior Manager tells me she thinks it is an external wall on which you can display messages or change the colour to suit the atmosphere.
Interaction of AIA and Integral Plant
We have seen that there is an AIA of £50,000 on which 100% relief can be claimed. This can be claimed on any plant, including “integral” plant, so (at the risk of stating the obvious), the trick is to make sure you claim the AIA against “integral” plant (10% WDA) before normal plant (20% WDA).
I am not referring to those plastic things which invariably leak and turn your garden into a swamp, but to one of the very few really sensible measures in the Budget.
The expenditure on plant and machinery above the amount qualifying for FYA (or, under the new regime, for AIA), is carried forward as the “pool” of expenditure that qualifies for WDA in the following year.
Until now, you have had to keep calculating the WDA on the “pool” every year, even when it reaches a ridiculously low figure like £100 (WDA of £25 due and £75 carried forward to next year).
From April, once the “pool” reaches £1,000 or less, you can simply write it all off and claim allowances on it.
Other Capital Allowances
There are other significant changes to capital allowances, either now or in the pipeline for next year, many of which have an emphasis on “green” technology. These will be the subject of an article in a later edition of the Tax Insider.
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