CAPITAL ALLOWANCES - 31.03.2011

Faster tax relief on equipment costs

Slow rate of relief

Just a few years ago most businesses could expect to get the majority of the tax relief they were entitled to on the cost of buying machinery and equipment in around eight years. But both Mr Osborne and his predecessor put the brakes on so that for some assets it can take up to 23 years just to get a tax deduction for 90% of the cost. Why does it take so long?

Pooling

Expenditure, e.g. machinery, computers etc., must be grouped together and treated as one asset for tax purposes. This is called the capital allowances (CAs) pool. The cost of items bought are added to the pool, and the proceeds from a sale are deducted. If an item is scrapped, it has no effect on the pool. Tax relief is given on either 10% or 20% of the pool value at the end of your business’s financial year. This means that if you’ve sold or scrapped an asset, tax relief continues to trickle on for years. But the good news is that most businesses don’t have to bother with CA pools.

Claiming AIA is often enough

Where you purchase items of machinery etc. which cost less than £100,000 in total between now and March 31 2012 for companies, or April 5 for other businesses, you don’t have to add the cost to the capital allowances pool. Instead, you can claim tax relief on all the expenditure for the year of purchase; this is called the annual investment allowance (AIA). But changes announced by Mr Osborne last year, and confirmed in this year’s Budget, will mean the AIA is to be slashed to just £25,000 from April 2012.

Tip. If you’re preparing budgets for spending on machinery etc. for your next financial year, aim to maximise your expenditure before the AIA is cut to £25,000.

Compensation for a lower AIA

In the Budget Mr Osborne announced another change to the CA rules, as an attempt to compensate for massacring the AIA. This came in the form of an extension to the so-called short life asset rules.

Short-life asset rule

Prior to the Budget, where you spent in excess of the AIA on machinery etc. you didn’t expect to use for more than four years, you could make a so-called short-life asset election (SLAE) (see The next step). This allowed you to exclude its cost from the CA pool. Although tax relief is given on the cost at the same rate as if it were in a pool (10% or 20%), when the asset is sold or scrapped you can claim a tax deduction for the balance of the cost. The result is that instead of waiting well over a decade to get full tax relief, it will only take a maximum of four years. But the Budget changes this.

Tip. From the beginning of April 2011 you can make an SLAE for assets you intend to use in your business for up to eight years. This is most likely to be useful for assets such as company trucks, computers etc., which in the current economic climate you might want to hang onto longer than usual, but it won’t really compensate for the cut in the AIA from April 2012.

For a free sample SLAE, visit http://tax.indicator.co.uk (TX 11.13.02).