Thanks to our strategic partner Ensors Chartered Accountants, we have pleasure in explaining some important changes to Capital Allowances which may have an impact on your business.

Annual Investment Allowance (AIA)

From April 2012 it is proposed that there will be a reduction in the AIA from £100,000 to £25,000 a year.  This allowance gives 100% relief in the year of purchase for qualifying plant and machinery; remember that the allowance may have to be shared with connected businesses.

The reduction in the reliefs will be from 1 April 2012 for incorporated businesses and from 6 April 2012 for unincorporated businesses.

There are transitional arrangements in place for accounting periods spanning April 2012.  The amount of relief available will be pro-rated and will depend on your accounting period, and there is a particular trap here for the unwary.  If, for instance, a company has a June year end, then the total AIA available for the year to June 2012 will be 274 days of £100,000 and 91 days of £25,000 = £81,301.  However, if purchasing items from April, only a 91 day apportionment of the £25,000 limit will be available, i.e. £6,233!

In order to maximise allowances, you may consider incurring expenditure before 1 April 2012 or 6 April 2012.

Expenditure is generally treated as being incurred on the date on which the obligation to pay becomes unconditional, which in most cases will be the delivery date.  However, there are additional rules which apply if the required date to pay is more than 4 months after the unconditional obligation to pay, or when purchasing plant and machinery via a hire-purchase agreement (in which case it is vital that the asset is actually brought into use in time).

If you are considering incurring early expenditure on plant and machinery, please do not hesitate to contact us, so that we can explain in more detail the amount of annual investment allowance that you will be entitled to.  We can also explain when the expenditure should be incurred in order to maximise the relief available.

Writing down allowances

In addition, annual writing down allowances for the general pool are set to reduce from 20% to 18% and from 10% to 8% for the special rate pool.  This means that without AIA, it will now take around 13 years to get 90% tax relief for a general pool asset, and a staggering 29 years for a special rate pool asset.

Short life assets

If the annual investment allowance is exceeded, it is worth considering making a short life asset election for general pool assets.  This is available where the life of the asset is expected to be less than eight years (extended from four years in April 2011), and is particularly worthwhile when it is likely to be disposed of for a low value (for example, computer equipment).

The election keeps the asset separate from the general pool, and ensures tax relief for the full economic cost of ownership, provided that the asset is sold or scrapped within 8 years.  The treatment is not available for cars and certain other assets, and can be considered when your accounts are being drawn up.

Leasing

An alternative to purchasing assets out right is to lease the asset under either an operating lease or finance lease.  The rental costs are deductible for tax purposes over the economic life of the asset, although there is a 15% disallowance for cars with CO2 emissions exceeding 160 gm/km.

The right solution for you will depend on the commercial costs of the different options as well as the tax position.  However, in comparing the options it is the net of tax position that needs to be compared.

This letter provides only a brief summary of the proposed changes from April 2012.  Please do not hesitate to contact your usual Ensors contact or myself for further information.

Yours sincerely

Robert Leggett
Corporate Tax Partner – Ensors Chartered Accountants
Direct Dial – 01473 220008