From 11 August 2008, a new definition of energy saving machinery applies for companies wishing to claim 100% capital allowances on energy efficient machinery.
The new lists can be found at www.eca.gov.uk.
When commercial property is acquired, capital allowances may be claimed on the part of the purchase price attributable to plant and machinery, whether fixtures or moveable chattels.
Historically the way of ascertaining the amount to be allocated to plant, a “just and reasonable apportionment”, involved a specialist valuation of the various components of a purchase (land, building and plant) relating the results to the actual price paid.
The amount claimable on this basis is generally higher than buyers expectation.
However, in 1997 an alternative procedure was introduced under which the buyer and seller could jointly elect to set a figure to be treated by both parties as the disposal sale proceeds and purchase price for the fixtures. This figure is binding on HMRC and any subsequent purchaser of the property.
The main problem with the election is that it tends to benefit one party over the other.
It is generally better for the seller to put a low value in the contract – the historical allowances over this figure are then retained by him. This means that the buyer then has minimal allowances. Conversely, the buyer wants as high a figure as possible while this may have tax implications for the seller. The only answer is to negotiate – and probably compromise.
The key thing though is to understand what you are being asked to sign and to know what previous owners have signed too.
The Government has recently published its response to consultations on changes to the way in which relief will be given for expenditure on plant and machinery.
This is just a brief reminder of the anomalies in 2008 of the new ‘annual investment allowance’ (AIA). This will be introduced in April to provide for a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars) and replace the existing first-year allowances for small and medium-sized enterprises.
The AIA will apply to expenditure incurred on or after 1 April 2008 for corporation tax (6 April 2008 for income tax). The same dates see the abolition of first year allowances. Where an accounting period overlaps the implementation dates the maximum AIA will be restricted according to the proportion of the period falling after the relevant date. This will give some strange results in the coming months.
As an example:
A business with a 30 April year end plans to buy plant costing £50,000. If it buys in March it will qualify for a first year allowance (FYA) of 50% = £25,000. The same acquisition in May (the first month of the next accounting period) will attract the full AIA = £50,000. The real problem is if the same acquisition were to be made in April when it would attract no FYA, the AIA will be restricted to one twelfth of the annual amount (£4,167) and the excess will attract a reduced writing down allowance of 24.58%, giving a total deduction of only £15,433.
Identical transactions will be taxed differently according to the date expenditure is incurred and the accounting date chosen!
Careful planning is very important.
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