Introduction »

Act now for allowances!

Now is the time to consider the potential impact of the forthcoming capital allowance changes on your business and whether plans should be put into place to advance expenditure to secure tax relief earlier.

The reductions in capital allowances originally announced last year come into force from April 2012, that is with effect from 1 April 2012 for companies and 6 April 2012 for the self-employed in business.

Reduction in Annual Investment Allowance (AIA)

The AIA provides 100% tax relief on most types of plant and machinery (not cars) including integral features for all forms of qualifying business.

Since April 2010 the maximum annual limit available has been £100,000 but this is to reduce to £25,000 for expenditure incurred from April 2012.

For many businesses, their accounting period straddles the date of change so the old and the new limits have to be apportioned. Unfortunately, the way in which the rules operate mean that there is a restriction so that any AIA entitlement for that part of the accounting period falling on or after 1 or 6 April 2012 is given only by reference to the appropriate share of the £25,000 limit.

This means for example that although a business which makes up accounts to 30 September 2012 appears to have an overall AIA of £62,500 as shown in the example below – the restriction limits the available AIA to just £12,500 for the period 1 April 2012 to 30 September 2012. There is no such restriction in the period 1 October 2011 to 31 March 2012 so the whole of the £62,500 entitlement could instead be spent in that period.

Tax relief impact

The combined effect of the reduction and the restriction mean that where a small company which currently pays tax at 20%, delays the replacement of some commercial vehicles costing £75,000 from March 2012 to April 2012, then it will lose £10,000 of immediate tax relief!

Writing Down Allowances (WDA)

The WDA rates are also to reduce from 1 April 2012 for companies and from 6 April 2012 for the self-employed.

These annual rates on qualifying plant expenditure not eligible for other allowances such as AIA will move from:

• 20% to 18% on expenditure allocated to the main plant pool and
• 10% to 8% on expenditure allocated to the special rate pool.

Special rate pool items includes integral features and cars with emissions in excess of 160 CO2 emissions.

The effect of these changes will mean that the period over which tax relief is obtained is extended. In fact according to the Government - ‘It is estimated that approximately two million businesses could see an increase in their tax liability as a direct result of this measure.’

So, taking advantage of other opportunities, which may accelerate capital allowances and the corresponding tax relief, becomes more pertinent. Please contact us to review your position.

Introduction »