Investing in Growth - changes to Capital Allowances

Recent Changes to Capital Allowances

Continued investment in equipment is vital to the profitable growth of most businesses.  Investment has often also been a way of reducing the taxable profits of a business, through claims to capital allowances.
There have been numerous changes in legislation over the last few years to the rates of capital allowances, and further changes will occur from April 2012. In this article we highlight some of the major changes and assess how these changes may influence your decision to either buy or lease assets in the future.

Rate Changes

In recent years significant changes have occurred in respect of Capital Allowances. With effect from April 2012 further changes are proposed which will have the effect of postponing the period in which the tax benefit occurs. This could have an adverse cashflow impact on your business.

Since April 2008, the writing down allowance (WDA) was reduced from 25% to 20%, but this was coupled with the introduction of the annual investment allowance (AIA), whereby businesses could obtain relief at 100% on an annual spend of £50,000.

April 2008 also saw the introduction of a new capital allowances pool for integral features (ie assets that are integral to a building such as lifts or central heating systems) with a new rate of 10% writing down allowance.
The following table summarises the different rates from 2008 to 2012:

Note – for sole traders and partnerships, the relevant dates are the 6th as opposed to 1st April.

As can be seen, from 1 April 2012,  not only is the AIA reducing from £100,000 to £25,000, the annual rate of writing down allowances is reducing from 20% to 18% and from 10% to 8% for integral features. As a result of these changes, the Capital Allowances available on a particular item of plant will be spread over a much longer period.

Short Life Assets Election

It is possible to elect for an asset to be treated as a short life asset.  From April 2011, the cut off period has been increased from 4 years to 8 years.

The rate of writing down allowance is no different to any other asset in the main pool. However, on a sale within the cut off period, a balancing allowance or charge will arise.  The election can be made for any machine, and the benefit of making the election depends upon whether or not the machine will be sold during the eight year period. Note that the actual useful life of the machine is irrelevant

So for example, if an asset is sold or scrapped for negligible proceeds after 3 years, and its its tax written down value were to equate to, say  54% of its original cost, the whole of that 54% can then be set off against the taxable profits of that year.

If no election had been made, the asset would have remained in the general capital allowances pool, and the remaining 54% would have been written off over a period of approximately 22 years

Care needs to be exercised when making the election to treat the asset as a short life asset as if the value of the asset on sale were to exceed the tax written down value, a balancing charge will arise. The excess will be fully taxable in that year, as opposed to being spread over a number of years as would have been the case if the election to treat the asset as a short life asset had not been made.

Cars
From April 2009, cars no longer qualify for a balancing allowance on disposal, and a car with CO2 emissions in excess of 160gm/km, the remaining allowances on sale will instead be spread over a period of over 30 years. For this reason, we are seeing an increasing number of clients starting to lease their cars, rather than purchase them outright.

Retrospective Claims

Currently, capital allowance claims can be made retrospectively and there is no time limit for submitting a claim.   Therefore, it is possible to make a claim in the current year relating to acquisitions made in previous years, if the allowances have not been claimed. Integral features within properties are the most commonly overlooked items that qualify for capital allowances.

However, in April 2012, HMRC is now proposing to introduce a time limit.  From this date, capital allowances will have to be claimed within a short period after acquisition of the asset, otherwise the purchaser will lose the right to tax relief completely.  The precise details are yet to be confirmed, but a time limit of two years after the expenditure has been incurred has been suggested. As a consequence, we strongly recommend that you consider what possible capital allowance may be available as soon as you contemplate making property related capital expenditure, in particular.

If you have any queries about forthcoming changes to capital  allowance legislation, or how best to maximise the tax benefit arising from your capital expenditure, please contact Ian Smethurst on 01204 551100 or your existing CLB Coopers tax advisor.