The changes to the capital allowances regime which commenced on 1 April for companies and 6 April for other businesses were set out in some detail over the last year, following Mr Brown's announcement of most of them in March 2007. The changes bring tax advice on capital purchases to the forefront, and will also provide minor computational complexity in the transitional period.

Main pool

Businesses should experience no real problems with calculations on the main pool, with the rate of writing down allowance being reduced from 25% to 20%. Accounting periods spanning the date of change will use a single rate of writing down allowance calculated by time apportioning the two rates to arrive at what HMRC calls a "hybrid rate".

As far as advice is concerned, there is only one point of interest. Those businesses which have not made short life asset elections in the past (mainly because of first year allowances) may find these elections useful in securing accelerated allowances where AIA will not cover the expenditure. It is highly likely that for most businesses (Government statistics indicate 94% in number) AIA will indeed cover all of their capital expenditure, but clearly very large businesses and groups of companies will still have significant assets outside AIA. To the extent that these items would be added to the main pool, a short life asset election may be beneficial, remembering the range of assets in respect of which such an election is not possible. This is in Section 84 CAA, and principally excludes cars, long life assets and assets held for leasing.

Where a short life election has been made a balancing charge will be incurred if the disposal proceeds exceed the written down value for tax purposes. This will be 80% of cost in year two, 64% in year three and 51% in year four. Where the disposal value is expected to be better than this, no election should be made.

Special rate pool

The special rate pool, with a writing down allowance of 10% is formed this year from the old long life asset pool and any expenditure on integral features from the date of change. However, as the long life rate has been increased from 6% to 10%, the transitional arrangements are slightly more complex. Businesses with existing long life pools should compute a time apportioned writing down allowance rate as described above, and apply this to the existing long life asset pool plus additions to 31 March or 5 April. This closing balance will be added to the new special rate pool as at the end of the accounting period. The new pool is formed of expenditure from 1 April (or 6 April) onwards, and takes a full 10% writing down allowance. The old long life pool is merged with this after the writing down allowances for the year have been deducted, leaving a single pool to carry forward to the next period.

Planning points here can relate also to the main pool. As de-pooling is not permitted, businesses should be absolutely sure that they have taken advantage of all environmentally beneficial expenditure and claimed 100% ECA’s wherever possible on their plant, and in particular any integral fixtures. Bookmark www.eca.gov.uk [1] and use it regularly.

Integral features

The new category of asset which is included in the special rate pool is straight forward once businesses are used to the terminology. It is worth emphasising, however that on the purchase or construction of a building, some fixtures will still count as plant for 20% allowances, while some (including some of what did not previously qualify for capital allowances) will be treated as integral features attracting 10%.

Life will become interesting when a building is sold second hand, as there will be an allocation of the proceeds between building, 20% pool and 10% pool. More work, rather than less, for those advising on capital allowances as a speciality.

Annual Investment Allowance

This new allowance will effectively turn capital expenditure into revenue for many smaller businesses, and combined with the small pool write off will remove the need to make capital allowance computations at all. However, small unincorporated businesses will see a downside of significant profit fluctuations and tax liabilities which are difficult to manage.

AIA can be claimed by almost all businesses. Singled out for exclusion are mixed partnerships, being a partnership not comprising only of individuals. No AIA claim is possible by such a partnership – the restriction is introduced by new Section 38A CAA, which is in para 2 of Schedule 4 to the Finance Bill 2008.

In terms of sharing an annual allowance, apart from restricting the allowance to one amount for a group of companies, most businesses should find that in practice they are not restricted in claiming – the "related businesses" rules are very simple and easy to understand, and likely to prevent abuse without troubling ordinary businesses.

AIA can be allocated to any assets purchased during the period, with the exception of cars, and therefore is available on special rate assets. For larger businesses, careful allocation of AIA can allow the business to maximise allowances by separating assets qualifying for ECA, and those for which de-pooling will be beneficial, allowing AIA to then apply first to 10% assets, and finally to 20% assets other than those de-pooled.

AIA is not available on cars. Here there is one concern for smaller businesses wishing to use the allowance to purchase a van. In capital allowance law there is an extended meaning of car; it includes any mechanically propelled road vehicle other than one "of a construction primarily suited for the conveyance of goods or burden of any description, or of a type not commonly used as a private vehicle and unsuitable for such use." (Section 81 CAA 2001). Where there is a private use adjustment on a van, it clearly is used for private purposes, and therefore the "unsuitable for such use" is undermined. This section has in the past been used occasionally to deny first year allowances on vans, but the issue is of far more significant concern in the context of AIA. If allowances have been claimed in full on a van costing £24,000, only to find that the amount is restricted to £3,000, very significant amounts of tax and interest could be at stake.

There is a further issue which will complicate this approach. The intention to move the capital allowance regime for cars to a full CO2 basis from April 2009 will be problematical with "vans" which are deemed to be cars for this purpose, as some do not have an official emissions figure. While these would most likely be treated as "high emitters" by default, there is really no reason for this complicated state of affairs to persist. It is not sensible to have a different understanding of a van for capital allowances, VAT and benefits in kind. It would be useful if HMRC would clarify the meaning of van in relation to the new AIA, as many businesses will be hoping for extra tax help when they next replace a van.