Changes to Capital Allowances – so take advantage now!

If you are a business owner with a keen interest in reducing corporation tax, then you need to consider the changes to Capital allowances.

From April 2012 the period of time over which businesses will obtain tax relief for their capital expenditure will alter.

Many Capital Allowances changes have been announced in previous budgets, and in Budget 2011 George Osborne announced more. Businesses should factor the new profile of tax relief into their projections; and leasing may be affected.

In summary, changes to capital allowances from April 2012 are:

  • Annual investment allowance: the 100% immediate write off will apply to £25,000, rather than £100,000 as at present of expenditure on plant and machinery (the AIA excludes cars and plant for leasing)
  • Writing down allowance: the rate will fall and be 18% instead of 20% of the balance of pooled expenditure.
  • Long life assets writing down allowance: reduces from 10% to 8% per annum
  • Enterprise zones: subject to consultation, enhanced or accelerated allowances may be introduced.

One positive change effective this April that will reduce the impact of the lower rate of allowance on the general pool is that, subject to the company making the election, an asset can be kept out of the general capital allowances pool for up to eight years. At present if a company elects for short life asset treatment and still owns the asset after four years the remaining expenditure transfers to the general pool. A later sale or scrapping does not trigger tax relief for the remaining net cost. This period will now be eight years.

The fall in plant allowance from 25% to 18% means that after four years there’s a considerable unrelieved cost. Of £10,000 spent on plant and machinery in April 2011, more than £4,400 is unrelieved at the end of year four. Say this is scrapped in year 5, it will take until year 12 to obtain tax relief for 90% of the cost. Eight years will give businesses more opportunity to obtain relief for the full net cost of items such as computers that are kept for more than four years. However, it does mean an additional administrative burden to track individual items of expenditure for up to eight years.

We would have thought that accountants would have informed their business owner clients of these changes. However it would appear that not all accountants are pro-active with advise , early this could have a big impact on a business. In our opinion forward planning is essential as many businesses may be better off by bringing capital purchases forward if they are in a strong financial position.

The savings in corporation tax may be considerable.

Do you have a question on any aspect of business planning, tax planning, tax avoidance or financial planning? Contact our Financial Planning Consultants, at Pareto Lawrence we offer Financial and tax planning advice to corporate and private clients.

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