Plant investment tax breaks to be cut

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The system of capital allowances will see significant changes from April 2012, and it is worth making sure you are prepared for them.

The alterations will include a reduction in the amount of expenditure on plant and machinery that qualifies for a 100 per cent year-one write-off (via the annual investment allowance) from £100,000 to £25,000. The changes will inevitably have an impact on many businesses, especially those facing a need to invest substantial amounts in plant and machinery.

Capital allowances permit businesses to write off the cost of capital assets, such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax. Common allowances currently available are noted below.

Annual investment allowance (AIA)

This 100 per cent allowance enables most businesses, regardless of size, to reduce their taxable profits by the full amount of their annual capital expenditure on most plant or machinery (apart from cars) up to a maximum amount, which is currently £100,000 a year. In most circumstances it will be beneficial for a business to claim the maximum AIA available.

Apart from reducing the amount of tax payable (by up to 50 per cent for additional rate taxpayers), an AIA claim can protect the personal allowance of a business owner earning more than £100,000 in that initial year of purchase. The lowering of profits can also have a dramatic effect on an individual’s entitlement to claim tax credits.

Writing-down allowances (WDA)

Where capital expenditure is greater than the AIA, the excess normally enters the main rate pool. However, there is a special rate pool for expenditure on long-life assets, the addition of thermal insulation to existing commercial buildings, cars with CO2 emissions of 160 g/km or more and integral features of buildings.

The rate of WDA, on the reducing balance basis, is currently 20 per cent per annum for the main rate pool, and 10 per cent per annum for the special rate pool.

Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to use their allowance to obtain a 100 per cent write-off for expenditure which would otherwise qualify for a lower rate of allowances (such as long-life assets or integral features).

Single asset pools

Single asset pools are required for: short-life assets (see below); any asset with part-private use by a sole trader or partner; and expenditure before April 2009 on cars costing over £12,000.

Short-life assets

Some assets are projected to wear out over a short period of time and pooling them would result in their value not being fully relieved when they are disposed of. So it is possible to make an election to have capital allowances on any such assets calculated in separate single asset pools.

This leads to a balancing allowance or charge arising if the asset is disposed of within four years from the end of the accounting period in which it is acquired. If the asset is still held at the end of that period, the tax written down value is transferred into the main pool.

Write-off of small pool values

Where a pool balance (main or special) is less than £1,000, it is possible to claim all or part of it as a WDA.

This removes the need to carry forward small balances with ever-decreasing WDA claims. This measure does not apply to single asset pools.

Impending changes

The maximum amount of the AIA will be reduced to £25,000 a year from April 2012. Where the accounting period spans April 2012, the maximum amount of AIA entitlement is calculated on a pro-rata basis.

For chargeable periods ending on or after 1 April 2012 (for businesses within the charge to corporation tax) and on or after 6 April 2012 (for businesses within the charge to income tax), the rates of WDA will be reduced to 18 per cent (main rate pool) and eight per cent (special rate pool).

Since the rate changes apply from a fixed date, for those businesses where the accounting period spans the change date, hybrid rates will apply for the whole of the transitional chargeable period.

For example, if Asset Ltd’s accounting period begins on 1 January 2012 and ends on 31 December 2012, approximately a quarter of that period would fall before the date of change and approximately three quarters would fall after that date. The WDA for the main pool will be 18.49 per cent in the transitional year, and 8.5 per cent for the special rate pool. Asset Ltd will also be subject to a transitional AIA maximum, calculated as follows:

The period from 1 January to 31 March, is 91 days, so the amount involved is 91/366 of the present rate, £100,000, or £24,863. The rest of the year is 275 days, so the amount is 275/366 of the new rate, £25,000, which comes to £18,784. The total transitional AIA maximum is thus £43,647.

Asset Ltd may have planned to buy machinery worth £80,000 in February 2012 to make use of the current £100,000 AIA limit. However, the calculation above shows that the amount of AIA which may be used against expenditure incurred in the whole of 2012 is limited to £43,647 with the balance getting the WDA of 18.49 per cent and thereafter at 18 per cent on a reducing basis.

So is there an alternative available?

The most obvious would be to advance the purchase to before the year-end affected by these changes. The purchase would then be in the previous accounting period which does not contain any changes in the AIA maximum. Businesses must consider whether this makes commercial sense and in some cases this will not be possible, depending on the businesses’ year end.

Another, more drastic, alternative would be to change the accounting period end, for example to 31 March 2012. The purchase in February 2012 would also be in an accounting period which does not contain any changes in the AIA maximum. There could, however, be repercussions in terms of additional cost and possible advances of tax liability.

If you intend to invest in your business and want to discuss the impact of capital allowances on your plans, please contact us and we will be able to go over the alternatives available to your business.