Is it time to reconsider short life assets?

By Steve Watts

Following the significant changes to capital allowances introduced in Finance Act 2008, it may now be worthwhile reconsidering the availability of short-life asset treatment for qualifying expenditure on relevant assets.

Claiming short-life assets have often been discounted due to the potential complexity of identifying relevant assets and the ability to track the disposal of assets. However, with the reduction in rates for general plant and machinery from 25% to 20% per annum on a reducing balance basis, from 1 April 2008, the period over which approximately 90% of qualifying expenditure is now written off for tax purposes increases from 7 years to 11 years. With short-life asset treatment, a disposal within the 4 year period will allow the full cost of an asset to be written off for tax purposes over 4 years or less. Therefore accelerating the rate of which tax depreciation is available.

For certain companies it may not be practicable for individual capital allowances computations to be maintained for each and every short-life asset particularly where these are held in very large numbers. HMRC published a Statement of Practice in 1986 (SP 1/86) detailing options that can be adopted to simplify the process for capturing short-life assets where the identification of short-life assets acquired in a chargeable period can be either impossible or possible but impractical. Where this occurs it is possible to deal with the assets in batches of acquisitions and base the short-life asset treatment on average actual life of assets. Alternatively where assets costing similar amounts can not be identified individually and are not tracked separately then disposal proceeds can be regarded as relating to the earliest period for which short-life assets remain in the pool.

With the changes in rates, it may be worthwhile revisiting the opportunity of claiming short-life assets for any relevant expenditure and if applicable the possible approaches to capture and track relevant expenditure. (It is worth remembering that Finance Act 2008 withdrew the availability of short-life asset elections for any plant and machinery qualifying as integral features). Successfully identifying and claiming short-life assets could result in accelerated tax depreciation being available.

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Steve Watts is a director at Bourne Business Consulting LLP. He has specialised in asset taxation for over 14 years, advising clients in the consumer business, real estate, pharmaceuticals, technology and manufacturing sectors, as well as focusing on green tax incentives.