Budget 2007: Surprise overhaul announced for capital allowances from 2008by
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The proposed reforms to the capital allowances regime are intended to remove "outdated incentives" from next year.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.