This E-Update features on Capital Allowances. Capital allowances are given where qualifying capital expenditure is incurred. They enable capital expenditure to be deducted against income rather than being carried forward for deduction on a future disposal of the asset. Therefore, in most circumstances tax relief can be achieved earlier and at a higher rate.
WHAT IS GOING?
- The writing down allowance for expenditure on plant and machinery will be reduced from 25% to 20% from 2008-09.
- From 2008-09 the writing down allowance on fixtures integral to a building will reduce to 10%. The scope and detail of the provisions will be subject to consultation.
- Balancing adjustments are no longer available on disposals of agricultural and industrial buildings.
- Agricultural and Industrial Buildings Allowances will be phased out over a period of four years, by 1 April 2011. The 4% allowance will be racheted down by 1% a year from 2008/09
WHAT IS COMING?
- The temporary rate of 50% for first year allowances for small businesses’ expenditure on plant and machinery has been extended for a further 12 months.
- The introduction of an annual investment allowance on the first £50,000 spent by small and medium sized businesses on plant and machinery from 2008-09. The final details of this measure will be subject to consultation.
- There will be an increase in writing down allowance on long-life assets from 6% to 10% from 2008-09.
- From 11 April 2007 capital expenditure on the renovation or conservation of certain business properties in designated areas of the UK and Northern Ireland which have been vacant for at least a year will qualify for a first year allowance of 100%.
- From 2008/09 a repayable tax credit will be introduced for losses resulting from expenditure on certain designated “green” technologies. This is still subject to consultation.
- Consultation continues on the taxation of cars. The governments preferred option is to simplify record keeping for capital allowances and lease costs of cars by basing future capital allowances on CO2 emissions.
WHAT ACTION SHOULD BE TAKEN?
Categorisation of Capital Expenditure
It is important that the categorisation of capital expenditure is reviewed thoroughly to maximise the allowances that are still available.
For example we recently took on a new farming client and one of the first jobs we did was to review the categorisation of the expenditure that was included in their agricultural building allowance (ABA) pool.
The ABA and IBA pools provide relief at 4% per annum over 25 years. For this client the ABA pool resulted in tax relief of approximately £14,000 per annum. However, as mentioned above ABAs and IBAs are being phased out therefore the relief would reduce over the next four years until there would be no further relief by 2011. We calculated that this would result in £5,600 of extra tax payable each year for this particular client.
We have found in many instances that expenditure on buildings such as milking parlours has been fully categorised under ABAs when a substantial part of the overall expenditure would have been on plant and machinery that would have qualified for first year allowances at up to 50% followed by 25% written down allowances thereafter, reducing to 20% from 6 April 2008.
By reclassifying the expenditure to the general plant and machinery pool we were able to increase relief per annum on that expenditure by £40,000 per annum and provide an overall saving after 6 April 2008 of approximately £16,000 per annum.
Expenditure on Fixtures and Fittings
Where you are planning expenditure on fixtures and fittings you should consider bringing the expenditure forward to potentially take advantage of the higher writing down allowance rate on expenditure allocated to a pool before April 2008.
HOW TO MAKE THE MOST OUT OF CAPITAL ALLOWANCES
There are many practical situations where we believe taxpayers are not claiming all they are entitled to. In addition there are a few circumstances where investment in property and vehicles can be aided by capital allowances. We have summarised the main points below: -
Where you are committing to purchase, construct, redevelop or improve a property that is either to be used within your business or to be let out it is important that capital allowances are considered.
A property that has an existing business such as a hotel, public house or nursing home would contain a substantial amount of fixtures and fittings such as lifts, security and fire systems as well as furniture.
To ensure a proportion of the expenditure on the purchase or improvement of such a property can be claimed against future income from that property it is important that the split of the purchase price or improvement cost is considered at an early stage. In certain circumstances this could also lower the potential stamp duty land tax payable on the purchase.
It is also important to review the split on a property sale for tax purposes.
For construction, re-development and improvement to a property in an ideal world a full breakdown of costs should be made available in a suitable format for allocating the expenditure between the structure and setting of the building and fixtures, fittings, plant and machinery as well as repairs and renewals.
Quite often a review of the invoices is not enough, as they will not provide the detail required. Therefore it is important that the property owner speaks with their tax advisor at an early stage and ensures their builders provide the information required in a format which will enable a claim to capital allowances.
Allowances are available for certain conversions of empty spaces over shops into flats. The cost of conversion or renovation is given as an allowance to offset rents received from the letting, which would probably result in a rental loss.
In normal circumstances rental losses cannot be used to offset other income before tax is calculated. However, rental losses that arise as a result of excess capital allowances can be offset against other income. Therefore this kind of investment is very tax efficient for high net worth individuals.
In addition, the conversion costs are also available to offset the sale price for capital gains purposes, so effectively tax relief is achieved twice.
You can obtain a 100% first year allowance on certain plant and machinery.
There is a government list of hundreds of items that qualify as energy saving plant, including motors, boilers, refrigeration and thermal equipment, so this is worth checking when you are looking to purchase new plant. The list can be viewed on www.eca.gov.uk
As a manufacturer of plant you should also consider registering your items on this list.
Landlords Energy Saving Allowance (LESA)
In 2004, the LESA was introduced, which provides an allowance of up to £1,500 for landlords who invest in cavity wall, loft, solid wall and hot water system insulation, as well as draught proofing insulation.
Following consultation, the government no longer intends to reform the wear and tear allowance by making it conditional on the energy efficiency of the property. However the government intends to extend the scope of the existing LESA to include
- the expansion of LESA to corporate landlords
- an extension of the scheme from 2009 to 2015
- the application of the allowance per property rather than per building
- ensuring that even smaller properties have access to the full allowance
- the addition of the acquisition and installation of floor insulation as qualifying investment.
A New Car Funded by Tax Credits
For certain individuals the rules for awarding tax credits can be manipulated to enhance them and fund the purchase of a new car. See example below: -
Example 1 – Energy efficient car
Jo has a new business that over time will become profitable, however she is currently investing in equipment to set it up. She works approximately 35 hours a week, is divorced and has two children under school age. Both are with a childminder which costs £200 per week for 45 weeks a year.
Jo has budgeted for profits for 2007/08 of £18,000. She is considering purchasing a new car but is concerned about how she will finance the purchase. The new car would be a Toyota Yaris 1.4D- 5 door; cost £9,865, emissions rating 113g/km which will attract 100% first year capital allowances. The car will be used 90% for the business.
If she buys the car now her taxable profits would reduce to £9,121 (£18,000 – 9,865 x 90%) and her tax bill would be £901. Her tax credit award would be £14,126.
If on the other hand she decided to retain the old car her tax bill would be £3,564 an increase of £2,663. Her tax credit award would reduce to £10,840, a reduction of £3,286. This reduced tax credit award would be for two years so there would be a total loss in tax credits of £6,572.
In summary the net cost of the car purchase is as follows: -
Cost of car £9,865
Tax and NIC saved (£2,663)
Additional tax credit 07/08 (£3,286)
Additional tax credit 08/09 (£3,286)
Net cash cost of car £ 630
Example 2 – A Van
With similar circumstances to Jo, Michael has budgeted income for 2007/08 of £28,000. He is considering purchasing a new delivery van for use solely in his business at a cost of £20,000.
If he purchases the van in 2007/08 it should qualify for 40% first year allowances. Assuming he sells the van in 2009/10 tax relief could repay its purchase cost as follows: -
Purchase cost £20,000
Tax & NI saved (£ 2,400)
Additional tax credit (07/08) (£ 2,960)Additional tax credit (08/09) (£ 2,960)Sale price (£12,000)
Net cost of car (£ 320)
Posted on 01 Jun 2007
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