Planning for the new capital allowance regime

Significant changes are planned for the tax relief available on the purchase of plant and machinery for businesses from April 2008.

The changes were announced in the Budget in March 2007 but with very little detail. In recent months details have been announced which put some flesh on the bones of the proposals. If you are planning to incur capital expenditure on plant in the next few months we are now in a position to consider the tax effect of accelerating or deferring expenditure.

For small and medium sized businesses, the main effect of the changes is the withdrawal of First Year Allowances (FYAs) - currently 50% for small businesses and 40% for medium sized businesses - and the introduction of an Annual Investment Allowance (AIA). The allowance will give immediate tax relief for the cost of equipment within an annual limit of £50,000. All items that currently qualify as plant or machinery, including fixtures in buildings and vans, will be eligible for the AIA if purchased on or after 1 April 2008 for companies, and from 6 April 2008 for unincorporated businesses.

Other factors to take into account in capital expenditure plans are:

writing down allowances (WDAs) for plant and machinery in the ‘pool’ of unrelieved tax expenditure are being reduced from 25% to 20%
the purchase of certain fixtures integral to a building, which may currently qualify for the same rate of allowances as other plant, will go into a new ‘10% pool’ which will have a WDA rate of 10%.

Expenditure in excess of the AIA will get relief in the year of expenditure at the 20% or 10% rate.

So should you acquire plant and machinery before or after April 2008?

The answer, of course, is that it depends. But, generally speaking, it will be more attractive to take advantage of the full tax write off given by the AIA rather than the percentage given by FYAs. However, it is important to take into account the maximum AIA given in the first accounting period wholly or partly within the new regime. So if for example a company has a 31 March year end, spending plans need to be considered up to 31 March 2009. See the example opposite.

Fixtures

A situation in which it is worth considering accelerating expenditure is if significant expenditure is planned on ‘fixtures integral to a building’. We don’t know exactly which assets will be classified as integral fixtures but they are likely to include central heating, general lighting and air conditioning. Expenditure before April 2008 may qualify for FYAs and the balance of the expenditure will fall into the ‘pool’ (giving allowances at 25%/20% pa). Expenditure after March 2008 may qualify for the AIA but will otherwise only qualify for 10% WDAs.

What if your accounting period does not end on 31 March or 5 April?

This adds some complications! Where an accounting period does not start on 1 or 6 April the first AIA limit will be proportionally reduced. If a company’s accounting period runs from 1 January 2008 to 31 December 2008 it will get nine months worth of the AIA (£37,500) for expenditure between 1 April 2008 and the end of the year.

The rate of WDAs will also be subject to a special computation which will give a rate of between 25% and 20%.

You may need some assistance from us in these circumstances to decide whether you should purchase your new equipment before or after April 2008, so please talk to us before you buy.

Example
A company has a 31 March year end and is a small business. There is planned expenditure on plant of £80,000 up to 31 March 2009. If all of this is incurred after 1 April 2008, the allowances will be:

	Accounting period to:
	31.03.08	31.03.09	31.03.10
FYA/AIA	£Nil	£50,000	£Nil
WDA (20% on £30,000)		£6,000
WDA (20% on £30,000 – £6,000)			£4,800
Total allowances in each year	£Nil	£56,000	£4,800

If expenditure of £30,000 out of the £80,000 total is accelerated to fall in the year to 31 March 2008, the allowances will be:

	Accounting period to:
	31.03.08	31.03.09	31.03.10
FYA/AIA	£15,000	£50,000	£Nil
WDA (20% on £15,000)*		£3,000
WDA (20% on £15,000 – £3,000)			£2,400
Total allowances in each year	£15,000	£53,000	£2,400

*The balance of the expenditure which doesn’t qualify for FYAs is given relief for WDAs in the following accounting period.
In summary a key objective should be to maximise the £50,000 AIA as much as possible. Bear in mind though that deferring expenditure until after 31 March or 5 April may delay any tax relief on the expenditure by a full year for your business.