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Budget 2007: Surprise overhaul announced for capital allowances from 2008

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21st Mar 2007
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As a parting gesture, Gordon Brown announced a major overhaul of tax allowances for business investment in plant, machinery and buildings.

In his budget speech, the chancellor said he would expand on the scope of first year allowances for environmental equipment. The detailed budget press notice PN 01 explained that from April 2008 first year allowances on specified plant and equipment will be scrapped and replaced by an Annual Investment Allowance on expenditure up to £50,000.

For the next year the temporary first year allowance of 50% for small businesses investing in plant and machinery introduced last year will remain, and so will the 40% rate for medium-size business.

When they are scrapped, the annual investment allowance will be available to all businesses regardless of their size or legal form; 100% of their expenditure up to £50,000 on general plant and machinery other than cars be offset against taxable profits under the scheme.

HM Revenue and Customs officials emphasised that the 100% Enhanced Capital Allowances scheme for energy-saving heating equipment, water control and low carbon cars would remain in place when the new AIA is introduced.

Capital allowances are designed to let companies write off the cost of capital assets against a business’s taxable profits and take the place of commercial depreciation charged in commercial accounts, HMRC explained in Budget Note BN 06.

The main rate of capital allowances for general spending on plant or machinery is 25% a year on the reducing balance basis. First-year allowances (FYAs) bring forward the time that tax relief is available for capital spending and allow a greater proportion of the cost of an investment to qualify for tax relief.

The proposed reforms to the capital allowances regime are intended to remove "outdated incentives" from next year. Relief on spending on general plant will be reduced from 25% to 20% to bring it closer to economic rates of depreciation, while longer life assets - those that will be used for 25 years or more - will be subject to 10%, up from the current relief rate of 6%.

"This is pretty big, and pretty unexpected," said Paul Howard, senior tax consultant with Chiltern plc. "If they do it right, it will be very welcome. Despite the fact they are reducing the rate of relief, the current regime is much more complicated than it needs to be."

In a related move the chancellor announced a phased removal of the industrial buildings allowance (IBA) and agricultural allowance (ABA) from April 2008. At the moment if you build an industrial or agricultural building, you can get an allowance of 4% on the cost of construction. "If you have fixtures within the building that fall within definition of plant and machinery, you can claim a writing down allowance of 25%," Howard explained.

The 4% allowance will be racheted down by 1% a year over the next four years and replaced with a 10% capital writing-down allowance on integral fixtures. The detail design and scope of the integral fixtures provisions will be subject to consultations, the Treasury said.

"You could always claim capital allowances on fixtures, but I suspect they will ring fence the definitions to restrict what you can claim as integral. You may still be able to claim plant and machinery allowances on the rest," said Howard.

"This could make buildings and capital allowances more complicated than they already are. As things stand, a lot of people don't realise they can claim these allowances."

For more detail, see Treasury Budget Note BN06, part of its Master Notes file (5.8Mb PDF download)

  • Budget Note BN08 also announced the enactment of the Business Premises Renovation Allowance (BPRA) from 11 April 2007. This additional allowance provides 100% relief on capital expenditure to renovate or convert business properties that have been vacant for more than a year within designated disadvantaged areas. Renovation expenses on these buildings which previously qualified for capital allowances will now qualify for enhanced allowances.

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Replies (10)

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By User deleted
23rd Mar 2007 16:02

Wait for the Finance Bill...
I assume that the devil will be in the wretched details. Seems like it now may be worth selling off your industrial buildings if there are to be no balancing adjustments. Don't forget to make a claim for any unclaimed fixtures before 2008 too!

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By User deleted
23rd Mar 2007 12:25

Hypothetical question
An IBA is disposed of in two months time (completely falls in to the new rules)

Cost £1million
TWDV £600k

Disposal £800k

Normally, there would be a balancing charge. Will this situation result in the company keeping the CA's previously claimed (via some restriction on proceeds) instead of having them clawed back?

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By User deleted
21st Mar 2007 17:32

IBAs on second-hand buildings
Am I the only one who is puzzled about what happens on second-hand industrial buildings acquired before the Budget? If last week the taxpayer bought a building with a 15-year remaining IBA life, does he get IBAs over the next 15 years, are they phased out over four years, or what?

The Budget Notice BN07 and Chapter 3 of the Budget Report don't spell this point out as far as I can see.

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By Ian Lawrence
21st Mar 2007 22:53

Annual Investment Allowance
Won't this initiative encourage small businesses to hold off any purchase of plant and machinery until after April 08 so that they get 100% write down rather than 20% reducing balance ad-infinitum?

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By User deleted
22nd Mar 2007 08:44

Are they able to?
Would small businesses have the ability to hold off £50,000 of P&M purchases to take the 100%? Maybe larger purchases but they still have the 50% FYA for the next year on all purchases anyway.

IBAs are being phased out with a 1% reduction per year - the transitional plans look as if they will stop any balancing charges/allowances on disposals but do not say how the remaining capital value will be dealt with when IBA's/ABA's are no longer given allowances.

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Steven Bone
By Steven Bone
22nd Mar 2007 16:42

IBAs one-quarter reduction
To answer the original question by Adrian. His taxpayer would in the first instance be able to claim at 6.67% (i.e. the residue of expenditure over 15 years). Once the restriction starts to bite the rate will reduce by one-quarter each year. So in April 2008 it will reduce to 5%, in 2009 it will be 3.34%, in 2010 it will be 1.67% and thereafter nil (after April 2011 there will be no tax relief given for any residue of expenditure that has not already been written off).

Steven Bone
The Capital Allowances Partnership LLP (www.cap-allow.com)
Co-author of 'Tottel's Capital Allowances: Transactions & Planning' and Tolley's Handbook on The Capital Allowances Act 2001

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By andy.white.crosherjames
22nd Mar 2007 16:16

IBAs
The Revenue have confirmed that this is complete abolition of IBAs over the next four years - and so after April 2011 there will be no more allowances regardless of whether there is any outstanding qualifying years. So we go from 4% to 3% to 2% to 1% to 0% regardless of when the property was constructed/purchased.

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By The Minion
22nd Mar 2007 15:29

just joining in
because i don't know what happens after the transition period, it makes a big difference because i have major purchase of industrial building at moment, which would have been good to have nailed last week obviously!

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By andy.white.crosherjames
23rd Mar 2007 16:51

Gary's question
The answer is yes. Post 21 March 2007 on any disposal there is no balancing charge or allowance and the purchaser steps into the vendor's shoes with regard to claiming the remaining allowances - with the proviso that they will reduce by 1/4 every year after 2007/8.

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By Paul Soper
26th Mar 2007 15:28

Surprise overhaul?
I thought there had been announcements in the Red Book last year that the CAs system was being looked at for overhaul, and of course there has been comment by the revenue as part of the review of PMV CAs.

But how I wonder will those two interact? PMVs with a CO2 rate below 120gm/km will get a 100% FYA we are told, and if less than 165gm/km will go into the general pool. However it is the expenditure in the general pool which will qualify for the 100% Investment Allowance for expenses up to £50,000 pa s- - does this mean that all cars with a CO2 figure below 165g/km will qualify for a 100% allowance for traders spending less than £50,000pa. Seems too good to be true and you know what they say about things being too good to be true...

Apropos of the Investment Allowance, when we last had one of these (in 1972 I believe) it was a cash incentive and didn't affect the CAs available, but then went in 1974 when FYAs et al were introduced. Any chance of this Investment Allowance being given independently of the CAs system?

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