In our last e-update we outlined the fundamental changes brought in by the 2007 Budget and informed you of the action you should be taking.  To view the article please visit our web site at http://www.albertgoodman.co.uk/news_may-tax-news-capital-allowances_10_01062007.htm.

By the Treasury’s own admission, just one of the changes, a reduction in the rate of allowances generally available on plant (see below), will raise an additional £2.27 billion of tax by April 2010.  You will appreciate that these changes will affect almost all business taxpayers to a greater or lesser extent, but those with property are possibly particularly badly hit.

Further information on the proposals has now been published so we can bring you more advice on the changes and highlight areas that you will need to take professional advice on.  However, please note that the proposals have not been enacted and are still subject to change.  This is obviously a very unsatisfactory position to be in when these proposals will be affecting your current accounting year.

Reduction in Rates of Allowance

As explained in our previous article the current rate of allowance of 25% will decrease from April 2008 to 20% and to 10% for fixtures integral to a building (see below).

Where a business makes up accounts that straddle 1 April 2008 (corporation tax) or 6 April 2008 (income tax) the rate to be applied is calculated on a time apportioned basis, rather than by splitting the accounting period into pre and post April 2008 periods. 

Planning

It remains the case that careful analysis of expenditure is required to ensure plant is analysed out separately from building work and fixtures to ensure capital allowances are maximised.

See under the Annual Investment Allowance (AIA) planning heading below for further ideas.

Fixtures Integral to a Building

These are proposed to comprise fixtures such as lifts, escalators, central heating and air conditioning systems and will no longer qualify for capital allowances at 25% but will reduce to 10% from April 2008.  Sanitary-ware, kitchen equipment, curtains and blinds are currently still to be plant subject to the 20% allowance.

Fixtures such as electrical, heating and power systems and hot and cold water systems may be integral fixtures under the new regime, so might also qualify for 10% allowances.  Under the existing regime, unless these fixtures were trade specific no allowances would be available.

Planning

The definition of what are integral fixtures is a potential problem so careful invoicing and analysis will be required.  We suggest you contact us at the project planning stage to ensure your contractors can separate out qualifying items in their documentation.

If practical, you may like to consider bringing expenditure on fixtures forward to pre April 2008 to ensure the 25% capital allowance but where the fixture is electrical, heating and power systems and hot and cold water systems, which are not required for the specific purposes of your trade, you should consider delaying this expenditure until after April 2008.

Annual Investment Allowance (AIA)

This is possibly the most complicated of the new rules, particularly in the first year of introduction from April 2008. 

It replaces first year allowances (currently 40% or 50%) and basically provides for a 100% allowance for the first £50,000 of expenditure on plant and machinery (not cars).  Some businesses will be better off under this new regime, others will be worse off, it depends on the amount of expenditure a business incurs in a year on new plant. 

For example businesses with a March year end that spend no more than £50,000 per annum on plant will be better off but if a business spends say £150,000 on plant in one year, for example a farm purchases a new combine, or a new property is purchased with £150,000 worth of plant, they will have a 100% allowance on £50,000 and a 20% / 10% allowance on the excess.  A maximum total allowance of £70,000.  Under the old rules this might have been £75,000.

For businesses with accounting periods that straddle April 2008, or for long and short accounting periods, the £50,000 AIA will be time apportioned. 

For group companies, the AIA is shared between the number of companies in the group so they are potentially much worse off, although we do not know yet how this will work.  Associated companies and multiple unincorporated business should each be entitled to the AIA.

It is not clear at this stage whether we can choose how to allocate the expenditure.  For example, the taxpayer would receive tax relief quicker if the AIA is allocated to integral fixtures first and then to plant.

It is also not clear whether the AIA can be disclaimed to protect personal allowances in years of low profits or to make better use of any trading losses.

Planning

Any unused element of the £50,000 AIA will not be carried forward to the following year therefore where continued investment is planned utilisation of the full £50,000 should be reviewed before your year end.

The structure of group companies should be considered to review whether they would be better off as associated companies or unincorporated businesses.

Depending on the amount of expenditure planned consideration should be given to timing, as some businesses may be better off incurring the expenditure before April 2008 whilst others may be better off waiting until after.  We would advise you to speak to your usual contact at Albert Goodman for further advice on this.

Industrial and Agricultural Buildings Allowances

The biggest shock of the 2007 Budget was the abolition of IBAs and ABAs, which in effect is a retrospective withdrawal of tax relief for expenditure made up to 25 years ago.  This is the biggest blow to farmers, hoteliers and manufacturers.

Planning

As mentioned in our last e-update it is important that historical capital expenditure is reviewed to ensure any plant is analysed under the correct capital allowance pool.  We gave you an example in our last e-update of a new farming client where we have found a saving of approximately £16,000 per annum from April 2008.

Future expenditure on buildings should also be carefully analysed between building, integral fixtures and plant that qualifies under the AIA and 20% allowances to ensure allowances are maximised in the future.

Summary

The combination of old and new rules (which have yet to be finalised) plus a transitional year in between, will make it impossible to generalise on how you should structure your spending on fixed assets to maximise tax relief.  Having determined what your business needs to spend please contact us at an early stage for advice on how best to time your specific spending.

Posted on 12 Oct 2007