Capital Allowances – the changes ahead

A company, sole trader or partnership which buys equipment for ongoing use in the trade, is not generally permitted to write off the whole cost in the year when the expenditure is incurred. Instead, depreciation is usually charged, writing off the cost over the expected useful life of the asset. However, although a business can depreciate its assets over whatever period it deems appropriate, for tax purposes depreciation is replaced by capital allowances at rates prescribed by law.

The capital allowances regime has changed regularly over the last few years and is set to changes again in 2011/12, so what follows is a summary of the current position and next year’s changes.

Plant, machinery and equipment
For 2011/12, the Annual Investment Allowance (AIA) stands at £100,000. This means that the first £100,000 of expenditure by a business on qualifying assets receives a 100% capital allowance – effectively writing off the cost in the year of purchase.

If qualifying capital expenditure by a business exceeds the limit, the excess cost is “pooled” and the rate of capital allowances given (“writing down allowance” or WDA) is either 20%, for assets in the “general” pool or 10% for assets in the “special rate” pool (broadly, integral features, long-life assets and high-emission cars).

In the 2011 Budget, the Chancellor announced that capital allowances will be restricted from April 2012. For 2011/12, the AIA will be reduced to £25,000 and the rates of WDA will fall to 18% for the general pool and 8% for the special rate pool.

Where a business’s accounting period straddles April, a “hybrid” rate will apply in the accounting period covering April 2012, whereby the rates before and after the change are time-apportioned.

Business considering investment in new equipment etc in the coming months should therefore consider doing so before April 2012 to take advantage of the higher AIA. The exact timing of expenditure should be looked at extremely carefully, especially where the accounting period straddles 1 April (for companies) or 5 April (for unincorporated businesses) as the AIA is time-apportioned:

Mr A prepares his sole trader accounts to 5 April – his AIA for the accounting period to 5 April 2012 will be £100,000, so qualifying expenditure incurred on or before that date of up to £100,000 will be covered by the 100% allowance. Expenditure after 5 April 2012 will be subject to the AIA of £25,000.

X Ltd prepares its accounts to 31 December – its maximum total AIA for the accounting period to 31 December 2012 will be 3/12 x 100,000 + 9/12 x 25,000 = £43,750; however, the actual AIA which can be claimed will depend on the exact timing of the expenditure – where expenditure is incurred on or after 1 April 2012, the maximum amount of qualifying expenditure on which the AIA can be claimed will be limited to £18,750 (i.e.: 9/12 x £25,000).

Businesses considering making an investment in assets qualifying for capital allowances should consult their professional adviser to ensure that allowances are maximised where possible.

Cars
The capital allowances regime for cars has changed significantly in recent years – the rate of capital allowances given on the cost of a car now depends on the car’s emissions. For cars bought from April 2009 onwards:

• Low emission cars (110g/km or less) – attract a 100% first year allowance, so the entire cost is written off in the year of purchase
• Cars with emissions of over 110g/km up to 160 g/km – the cost goes into the general pool and attracts capital allowances at 20% (18% from April 2012)
• High emission cars (over 160 g/km) – the cost goes into the special rate pool and attracts capital allowances at 10% (to be 8% from April 2012).

For cars bought before April 2009, the old rules continue to apply until the car is disposed of or April 2014, whichever is sooner. Under the old rules, cars costing less than £12,000 were pooled but a car costing over £12,000 was kept in a separate pool, on which the maximum annual capital allowances were £3,000. Under the new regime, where there is any private usage, a car will continue to be kept separate so that a private use adjustment can be made to the allowances.

It is worth noting that under the new rules, motor cycles are specifically excluded from the regime for cars; expenditure on motor cycles is treated as expenditure on plant, machinery and equipment. 

Krystyna Knight, of Silver Levene provided research for this article.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk