Capital allowances rates to decrease from April 2012
In the last year or so I have been finding that many of my clients have been fortunate enough to be riding out the recession and have been either investing heavily in capital equipment or carrying out major capital refurbishment on their premises. As a result they have been able to take advantage of the tax savings currently available. With this in mind I thought I would give some guidance on the changes that will be occurring over the next eighteen months or so.
Annual Investment Allowance (AIA)
Since its introduction in April 2008 most businesses, regardless of size, have been able to claim an Annual Investment Allowance (AIA) on qualifying plant and machinery. This includes expenditure on commercial vehicles (not cars) and may also apply to replacement expenditure on certain fixtures in buildings (integral features), such as air conditioning and rewiring, where more than 50% in cost terms of the asset is replaced.
It was set at £50,000 on its introduction and increased to £100,000 from April 2010. In April 2012 the AIA will be reduced down to £25,000. Businesses should be considering their capital expenditure to maximise the Annual Investment Allowance available to them over the next two years. With the rate of Corporation tax reducing in April 2011 some companies may prefer to bring forward expenditure prior to this date to maximise further tax savings.
Many businesses will have an accounting/chargeable period that spans 1 or 6 April (6 April for sole traders and partnerships), so the AIA will have to be calculated pro rata for the period before and after the increase.
For a company that prepares its accounts for the year ended 31 December 2010, the maximum AIA available for the period overall would be £87,500. This is computed as 3/12 x £50,000 (£12,500) + 9/12 x £100,000 (£75,000). To ensure the full potential of this relief is achieved the company will need to get the timing of the expenditure right. Only £50,000 can be allocated to expenditure before 1 April 2010 (6 April for individuals in business).
The maximum AIA is tabulated below, assuming the transitional rules are applied as before when the AIA was introduced or increased:
|between 31/3/2011 and 31/3/2012||£100,000|
Where qualifying expenditure does exceed the AIA available, the balance from April 2010 only qualifies for Writing Down Allowance (WDA). This is 20% for the general plant pool and 10% for the ‘special rate’ pool which includes integral features of a building.
Both ABC Ltd and DEF Ltd make up accounts to 31 December 2010. They each have £87,500 AIA available.
ABC Ltd intends to buy plant for £80,000 on 1 September 2010. As this expenditure post dates the increase but does not exceed the overall amount available for the accounts period – 100% tax relief is available on the whole £80,000.
DEF Ltd has also spent £80,000 on qualifying plant. £60,000 was expended on integral features in March 2010 and £20,000 in May 2010. Only £50,000 of the expenditure incurred before 1 April 2010 will qualify for 100% relief. As the £10,000 excess relates to an integral feature only a 10% WDA of £1,000 is available. The £20,000 incurred in May 2010 will qualify for full AIA. This provides £71,000 allowances overall.
The WDA’s available are also set to decrease from April 2012. The main plant and machinery writing down allowances will reduce to 18% p.a. and the ‘special rate’ plant writing down allowances will reduce to 8%.
It is important to ensure that you take advantage of any planning opportunities and I would be very happy to discuss what strategies may be appropriate in your circumstances.
Feel free to give me a ring on 0151 678 7979.