Changes to Capital Allowances
So much attention has been given over recent months to the significant changes to the capital gains and non-domicile rules (see page 6 for more information) that it has been easy to forget that there are some other radical changes coming into effect in the 2008/09 tax year. These are the changes to the capital allowances regime that provides businesses with tax deductions over time for expenditure on plant and machinery for both companies and unincorporated businesses. In fact, the changes were originally announced last year and are now coming into effect following a lengthy consultation period.
The main changes are as follows:
First Year Allowances are abolished
First Year Allowances (FYA's) were previously available to small and medium sized businesses at the rate of 50% on an unlimited amount of plant and machinery purchases. However, the 100% allowances on certain environmentally beneficial expenditure remain.
The introduction of the Annual Investment Allowance
The Annual Investment Allowance (AIA) will give 100% relief on the first £50,000 of qualifying expenditure on plant and machinery fro m April 2008 (irrespective of the size or form of business). There are transitional arrangements where the accounting period straddles 1 April 2008.
Groups of companies will only get one £50K allowance shared between the group members which they can allocate in such a way as to maximise tax efficient use.
Cars will not benefit from the AIA.
Writing down allowances are reduced to 20%
The Writing Down Allowance (WDA) for both the general pool and for cars will be reduced from 25% to just 20% for accounting periods ending on or after 1 April 2008.
The introduction of the Special Rate Pool
Plant which is integral to a building will no longer be treated the same as other plant and machinery and will be included with long life assets in the Special Rate Pool which has the less favourable WDA rate of 10%. However, these assets can have the AIA allocated to them.
Repayments of Tax
Where a company generates a loss as a result of FYAs on assets qualifying for enhanced capital allowances, it may be able to claim a physical repayment if it has paid sufficient PAYE . Enhanced capital allowances are the allowances given on certain categories of "green' plant and machinery that are energy saving or environmentally beneficial.
Industrial Buildings Allowances and Agricultural Buildings Allowances
These allowances will be phased out over the next three years.
Next year - more changes for cars
Next year more changes will be introduced to implement an emissions-based approach for cars. A 100% allowance already applies for the cleanest cars. The remainder will be restricted to WDA of 10% or 20% depending on the CO2 emissions.
Planning
In future you will need to carefully consider:
- The efficient allocation of the AIA
- Elections to de-pool assets, particularly if they are likely to depreciate quickly
- The identification of environmental assets that qualify for enhanced allowances
As with some of the other recent changes to taxation rules, there will be winners and losers. The introduction of AIA will favour most small businesses by effectively re-introducing 100% allowances. However, larger businesses will suffer from the reduction to the annual WDA. The government claims it is trying to simplify the capital allowances regime but for many it is a case of increasing complexity which will need careful planning to maximise allowances.
If you have any questions about how the changes could impact on you, please call Charles Green on 020 7022 0050.
If you have any questions about how the changes could impact on you, please call Charles Green on 020 7022 0050.
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