DFK UK & Ireland

Finance Bill 2008 - Reforms to Capital Allowances

This article covers the proposed changes to the capital allowances regime as included in the 2008 Finance Bill.

CAPITAL ALLOWANCES

The changes to capital allowances are as follows:

A reduction in the main rate of capital allowances on the general pool from 25% to 20%
An increase in the rate applicable to long life assets from 6% to 10%
To separate fixtures integral to a building and provide 10% allowances on them
The phased withdrawal of IBA’s (and ABA’s) so that the effective rate of allowance falls to 3% from April 2008, 2% from April 2009, 1% from April 2010 and a full withdrawal from April 2011.

Main Rate

From 1 April 2008 a company will be entitled to a 20% writing down allowance on expenditure in the main plant & machinery pool and also in single asset pools i.e. assets subject to a “short-life” asset claim.

For the accounting period spanning the date of change it is necessary to calculate a hybrid rate for capital allowances.

Short Life Asset Pools

The current rules relating to short-life assets will not change.

Integral Fixtures

The Finance Bill 2008 includes a new category of expenditure that will qualify for writing down allowances at the 10% rate.

There is no statutory definition of “plant & machinery” for capital allowances purposes and over the years a series of legal cases have drawn a distinction between equipment with which a business is carried on, and the premises or setting in which it is carried on. The former would qualify for capital allowances as plant and the latter will be part of the building and so either qualifies for industrial buildings allowances, or no allowance.

The Finance Bill 2008 removes from the main “plant & machinery” pool those items that are considered to be standard fittings in a “normal” modern building and place them in a 10% pool. It is proposed that a list of fixtures normally integral to a modern building will include

Lifts, escalators and moving walkways,
Central heating systems,
Air conditioning systems,
Electrical lighting and power systems, and
Hot and cold water systems

This extension to the types of asset that qualify for “plant & machinery” allowances means that some assets that do not currently qualify for allowances e.g. general electrical lighting and power systems and cold water systems will qualify from 1 April 2008.

The proposals apply to expenditure incurred on or after 1 April 2008. It is possible that expenditure that would previously have qualified for the plant & machinery pool may not qualify after this date. However, where items are already in the pool they will continue to qualify for the full writing down allowance.

Annual Investment Allowance

From 1 April 2008 all businesses will be entitled to an annual 100% investment allowance of £50,000. As an annual allowance the amount is reduced proportionately for reduced accounting periods. The allowance also only applies from 1 April 2008, which means that for the year ending 31 December 2008 the amount of the allowance will be £37,500.

It is proposed that the allowance will apply to expenditure on plant & machinery i.e. it does not apply to expenditure on business cars or buildings. Expenditure in excess of the allowance will be dealt with under the normal capital allowances regime and be eligible either for 10% or 20% writing down allowance.

A single company will receive the annual £50,000 allowance. However, a group of companies (Companies Act definition) will receive a single allowance and they will be able to allocate the Annual Investment Allowance between group members as they see fit.

If at all possible businesses should time capital expenditure so that the full Annual Investment Allowance is used in each year.

Cars

Two reforms from April 2009 have been announced regarding the tax treatment of business cars. Both appear to apply to existing cars as well as those acquired from April 2009 onwards.

Firstly, whereas from April 2008 business cars will attract 20% Writing Down Allowance, from April 2009 this will only applies to cars with CO2 emissions of 160g/km or less. Expenditure on cars with CO2 emissions above 160 g/km will only attract 10% Writing Down Allowance. It is unclear whether there will continue to be a restriction on capital allowances for “expensive” car, i.e. those that cost more than £12,000.

Secondly, the tax relief for car lease payments will be reformed. Currently a proportion of the lease payment is disallowed where the car had a list price of more than £12,000. Under the new proposals, any disallowance will instead be 15% of the lease payments where the car would be in the 10% special rate pool. This suggests that from April 2009 there will be longer be any disallowance for leased cars with CO2 emissions of 160 g/km or less.

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