Rates of allowance

The regime of first year allowances for small and medium sized business is to go and be replaced by a series of other allowances:

• annual investment allowance – £50,000 of expenditure written off immediately; 
•  “integral features” – annual allowances at 10%; a new concept that gives relief not only to certain items not previously allowed (eg energy saving awnings) but also includes items such as air conditioning and heating, that previously qualified as plant (on which allowances were available at 25%); 
• long life assets (broadly those with an expected life of more than 20 years) - rate of allowances increases from 6% to 10%; 
•  other plant and machinery – annual allowances fall from 25% to 20%; 
• industrial and agricultural buildings allowances – being phased out by 2011; and 
• enterprise zones – the present 100% allowance ceases in 2011.
  

Some of these are considered in more detail below.

Annual investment allowance

The 100% relief on £50,000 of expenditure will be available to all businesses, from April 2008. The allowance will be split between group companies or businesses under the control of the same person/people. It can be used against most items of allowable capital expenditure (the exceptions to this include cars) in whatever order or proportion the taxpayer decides.

Businesses with relatively small capital expenditure programmes may decide that it is better to wait until after the changes come into effect before spending money on plant and machinery; for larger, or more capital intensive, businesses, this change alone is unlikely to be significant.

Integral features

One of the most commonly missed tax reliefs has been the opportunity for businesses to claim relief for expenditure on tax allowable fixtures that form part of the ‘fabric’ of a building (for example air conditioning). From this Spring, the savings available to businesses will change significantly, as the items on which relief is due have been extended but the rate of relief falls from 25% to 10%. HMRC have also published a list of items that qualify for this relief – this includes electrical, water, heating and cooling systems.

Anyone who thinks that they may have incurred costs that might qualify for these allowances should review the position as soon as they can, as the reduction in the allowance could have a significant impact on both tax liabilities and cash flow.

Planning opportunities

With the abolition of first year allowances on expenditure above £50,000 and the reduction in capital allowance rates, businesses should look carefully at whether bringing forward capital expenditure might accelerate the rate at which they can claim allowances. Whilst the same amount of allowances will normally be claimed over time, the timing differences can be significant.

It is important to look at costs already incurred and see if they should be reallocated – for example, away from building fabric (no allowances after 2011) to plant (allowances available at 20%) and to consider the life of assets; short life asset claims may well be an important way to bring forward relief in the year in which assets are scrapped or sold.

You will appreciate that the above is only a general, basic, summary and detailed advice should be sought before any planning is undertaken. As with most things coming out of HMRC the devil is in the detail and further work will invariably be needed to confirm the best course of action in any given situation.

That said, if you think you might be affected by the new rules and would like to discuss what you can (or perhaps should) do before April please contact Cathy Corns or me.