From April 2008 a new system of capital allowances will be in operation. Accountant Chris Lane explains how this will affect your business
I've heard that the capital allowances system is going to be changed next year. What do I need to know?
In his 2007 Budget, Gordon Brown announced major changes to the capital allowance system that will apply from April 2008, as follows:
- Phased removal of industrial and agricultural buildings allowances.
- Reduction in the rate of the annual writing-down allowances.
- Introduction of an annual investment allowance of £50,000 for small and medium-sized businesses.
These changes will have a detrimental effect on the amount of tax that businesses will pay in the future.
Industrial Buildings Allowances (IBA)
Traditionally (up to March 2007), an annual allowance of 4% was granted on the cost of the fabric of a building over a 25-year life. This meant that the owners of an industrial building, which included hotels, were able to claim a 4% annual allowance of the cost of the building against its annual profits.
From 20 March no new IBA claims have been allowed. Furthermore, old existing claims will be scaled back by 1% over the next three years. So, for the tax year 2008-09, the annual allowance will reduce to 3% and so on each year until 2010-11, which will be the final year for any IBA claims.
For second-hand buildings purchased before 20 March the same scaling-back rules will apply.
Reduction in the rate of the annual writing-down allowances
From next year, the rate of annual allowance for plant and machinery will be reduced from 25% to 20%. There is also a new category of assets that has been defined as those that are integral to a building - for example, a lift or air conditioning. These assets will attract a new rate of 10% rather than the existing 25% allowance that is currently available.
This proposal was open for comments until last month, and we expect the result of this consultation to be published later this year. The only good news is that for assets defined as long-life assets - ie, with a life greater than 25 years - from 2008-09 the annual rate of allowance will increase from 6% to 10%.
Annual Investment Allowance
For small and medium-sized businesses, the Budget proposed that from April 2008, first-year allowances will be replaced by an Annual Investment Allowance of £50,000. Expenditure up to this level will be able to receive a full 100% allowance. Any excess will then fall into the general pool and receive either the 20% annual rate or the 10% rate for assets integral to a building. This annual allowance will apply to plant and machinery and will not include cars. Currently, small and medium-sized businesses are able to claim 50% first-year allowances for unlimited expenditure incurred.
The effect of these changes will probably be to reduce the overall amount of capital allowances available, increasing the amount of tax payable in the future by businesses. It is, therefore, important for businesses to review their tax calculations with their advisers and make sure they are aware of how these changes will affect them.
There might also be a window of opportunity before 1 April 2008, when these changes take place, to take advantage of the existing rules by accelerating planned expenditure.
- Review your tax calculations so that you are aware of the effect of the changes.
- Consider the timing of future expenditure to maximise the allowances available.
- Build any expected increased tax liabilities into your cash-flow forecasts.
Make sure that you fully understand how these changes will affect your business. Discuss all the implications with your advisers.
Chris Lane, partner at Kingston Smith, 020 7566 4000 firstname.lastname@example.org