Capital Allowances
Recent Finance Acts have introduced some significant changes to the capital allowances regime. We have summarised below some of the main changes.
Integral Features
Entities must now differentiate between integral features and other plant and machinery. Integral features are eligible for a 10% writing down allowance and Long Life assets are now pooled with integral features in the “special rate pool”. The new pool applies to expenditure incurred on or after 1 April 2008 for corporation tax and on or after 6 April 2008 for income tax.
HMRC have stated the following list of assets qualify as integral features:-
- Electrical systems (including lighting systems)
- Cold water systems
- Space or water heating systems, powered systems of ventilation, air cooling or air purification and any floor or ceiling comprised in such systems
- Lifts, escalators and moving walkways
- External solar shading
Care needs to be taken with repairs and replacement expenditure as not all repairs to an integral feature are classified as revenue expenditure and are therefore not fully tax deductible. Repair expenditure incurred over a 12 month period that totals more than 50% of the cost to replace that feature will only qualify for the 10% allowances.
As announced in the 2010 emergency budget, with effect from 1 April 2012 the writing down allowance for the “special rate pool” will be reduced to 8%.
Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) enable a business to claim 100% first-year capital allowances on expenditure on qualifying plant and machinery. There are three schemes for ECAs:
- Energy-saving plant and machinery
- Low carbon dioxide emission cars and natural gas and hydrogen refuelling infrastructure
- Water conservation plant and machinery
Businesses can write off 100% of the capital cost of their investment in these technologies against their taxable profits of the period during which they make the investment. Alternatively, if the ECAs create a loss this can be surrendered for a tax refund, capped at £250,000, representing 19% of the loss attributable to the ECAs.
ECAs apply to specific assets and details of these can be found at http://www.eca.gov.uk/
Annual Investment Allowance (AIA)
Businesses of any size that meet certain prescribed conditions are entitled to an AIA providing 100% relief for the first £100,000 of qualifying investment. AIAs replace the first year allowances for SMEs. Businesses can also be able to write-off unrelieved main or special rate pools of expenditure where they fall to or below £1,000.
Where businesses spend more than £100,000 in any chargeable period, any additional expenditure is dealt with in the normal capital allowances regime, entering either the special rate or main pool, where it will attract WDAs at the appropriate rate.
Companies that fall within the company law definition of a group are legally and economically inter-dependent and will therefore receive a single allowance per group. Where a person, or persons together, control a singleton company, but do not control any “related” company each such company will be entitled to its own AIA.
The AIA will have effect for most plant and machinery expenditure, but certain exceptions that apply to FYAs will continue to have effect for the purposes of the AIA. The main exception is expenditure on cars. However, unlike SME FYAs, the AIA will be available for expenditure on long-life assets and assets for leasing.
As announced in the 2010 emergency budget, the AIA will be reduced to £25,000 per annum from 1 April 2012.
Cars
For expenditure incurred on cars from April 2009, the rate of capital allowances will be linked only to CO2 emissions and will not depend upon cost. The disallowable proportion of lease rental payments (entered into from April 2009) will now also depend only upon their effect on the environment.
Expenditure on cars with emissions of 160g/km or less will be added to the general pool and attract writing down allowances (WDAs) of 20%. Where emissions exceed 160 g/km, the car will attract WDAs of 10 per cent and be included in the special rate pool.
These new rules are designed to offer taxpayers a considerable incentive to purchase environmentally friendly cars. There are transitional rules spanning a five year period for cars purchased before April 2009, so taxpayers should consider the merits of disposing of vehicles within this period.
For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.
