In the 2007 Budget, the Government announced an extensive number of changes to “modernise and simplify the Capital Allowances system” which provides tax relief for certain categories of capital expenditure.
The measures announced, which will affect historical as well as future capital expenditure, include changes to the writing-down allowances (WDA) for plant and machinery, a new category and rate of tax relief for fixtures integral to buildings and a phasing out by 2011 of industrial buildings allowances (IBAs) and agricultural buildings allowances (ABAs).
It is likely that the changes may have a significant impact on all businesses, but particularly those in the hotel, transport, utility and industrial sectors.
The details of the announced changes and the mechanisms by which they will be implemented have yet to be finalised. The opportunity to comment HM Revenue & Customs’ (HMRC) consultation paper ended on 19 October 2007, and some draft legislation has now been published. Further draft legislation, on the withdrawal of IBAs and ABAs, will be published in the next two months.
Annual Investment Allowance
An annual investment allowance of 100% of the first £50,000 of expenditure on plant and machinery (including integral features and long life assets, but not cars) is proposed, regardless of business size or form, from 2008 onwards. This will effectively give a 100% first year allowance on qualifying expenditure up to £50,000, with any balance of expenditure being dealt with under the general capital allowances regime. The annual investment allowance will replace the existing first year allowances available to small and medium businesses. A single allowance will be available for each group of companies.
IBAs and ABAs
IBAs (which also apply to hotels) and ABAs will be withdrawn in stages between 2008 and 2011, with the allowances being reduced by 1% (from the current 4%) each year. Transitional measures have been outlined for transfers of buildings between Budget Day 2007 (21 March 2007) and 2011, including the abolition of balancing adjustments, which will mean that the buyer of a building will claim the same allowance as the seller had previously.
The withdrawal of these allowances will mean that businesses will have unrelieved capital expenditure on which allowances were previously expected; resulting in an increase in operating or investment costs.
Writing-down allowances for plant & machinery and long-life assets
From 2008/09, the rate of WDA for plant and machinery in the general pool will be reduced from 25% to 20% p.a., a measure which forecasts suggest will raise £2.27 billion of revenue for the Treasury by April 2010. At the same time, the rate of WDA for long life assets (those with a useful economic life of at least 25 years) will increase from 6% to 10% p.a.
A new 10% rate of WDA for features integral to buildings e.g. lifts, air conditioning, electrical and lighting systems etc. will also be introduced. Items qualifying for the 10% rate are set out in a list. The inclusion of electrical and cold water systems in this list, is in effect, a tightening of the capital allowances regime, as businesses in the retail and leisure sectors, for example, currently tend to claim WDA for plant and machinery (at 25%) on such items.
Issues to consider
- Identifying & segregating qualifying expenditure. It has always been important to ensure that all expenditure qualifying for capital allowances is identified and claimed for, but with the withdrawal of IBAs and ABAs, it will become even more important to ensure that your business has claimed for all items of qualifying plant and machinery. From 2008 it will be necessary to split out your qualifying capital expenditure into four classifications: plant & machinery; long life assets; fixtures integral to buildings and environmentally beneficial plant and machinery which will qualify for enhanced capital allowances (ECAs).
- Reviewing previous capital allowances claims for open years. It is particularly important to review any disclaimed capital allowances in open years’ tax returns, as these will be lost or reduced in value from 2008.
- Bring forward planned capital expenditure. You may wish to consider bringing forward planned capital expenditure to ensure that the spend attracts tax relief before the rules change, but the cashflow effects of this must be carefully calculated.
- Deferred tax. In addition to their impact on current year tax and cashflow, the changes must also be considered when calculating deferred tax for company accounts.
Although the changes to the Capital Allowances regime will not be finalised until next summer, it is important that businesses start to consider their likely impact now.
For assistance please contact Rhona Neil using the online form below.