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AIA

Capital allowance changes – the practical impact

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22nd Jun 2010
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The reductions in corporation tax rates were balanced in the June Budget by lower capital allowances. Rebecca Benneyworth explains how they will work.

The planned changes to capital allowances were certainly less bad than had been anticipated. There were proposals from the Conservatives in opposition that there would be a massive “cut” of capital allowances to pave the way for the reduction in corporation tax rates.

In the event, the chancellor has taken a more balanced approach by phasing in the reduction in corporation tax rates, and at the same time taking a less aggressive attitude to the cuts in capital allowances.

Reduction in Annual Investment Allowance
When the Annual Investment Allowance was introduced in 2008, the then chancellor announced that 98% of all businesses would have their capital spend covered in full by the new allowance – set at an annual limit of £50,000.

This year, in a throwaway measure the limit for a year was increased to £100,000. This increase was hardly of benefit to smaller businesses – by definition – apart from those who have an occasional need to spend large sums of money. So the change which comes in from April 2012 covers all of the bases. It reduces the annual limit to £25,000 from the current level of £100,000, allowing businesses which need to make one of large spends the time to get finances in place to make the purchase this year. It also retains the benefit of simplification for smaller businesses which do not need to compute allowances for tax purposes, and will generally see their equipment allowed for tax as they incur the expenditure. With a welcome reduction in Exchequer cost. Neatly done!

Changes in rates
A small reduction in the rates of capital allowances for both the main pool and the special rate pool will save quite significant sums of money – well it will if you measure costs on a cash basis and not on an accruals basis. It is true that all businesses will still get the benefit of tax relief on the equipment that they purchase, but they will receive this tax benefit at a slightly slower rate than they would otherwise do. Another neat trick is to reduce the rates of writing down allowance from April 2012, while the reduction in the main rate of corporation tax is phased in over four years.

Overall the impact of the reduction as compared to both the current and recent rates of WDA give the following effect:

Rate of WDA % Time to write off 80% (years) Time to write off 90% (years) Time to write off 95% (years)
6% 27 38 49
8% 20 28 36
10% 16 22 29
18% 9 12 16
20% 8 11 14
25% 6 9 11

Post 2008
Businesses saw a double change from 2008, with writing down periods for routine purchases on which allowances reduced from 25% to 20% rising from 9 to 11 years (using 90% of the expenditure as a basis), but the period reducing for “long life” assets and the new integral features reducing from 38 years to 22 years as a result of the rise in rate from 6% to 10%.

2012
Businesses will now see the period over which tax relief is given rise for both classes of asset from 11 years to 12 years for most asset purchases, and from 22 to 28 years for long life assets and integral features.

All in all this seems a moderate way to finance a reduction in the rate of corporation tax – even if businesses do not consider that they have much to gain from the reduction in rates there seems little doubt that a reduction was necessary as a competitive measure, to keep the UK aligned or no worse than comparative rates through the EU.

Replies (7)

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By Helen Stevens
23rd Jun 2010 14:41

Some small businesses DO spend over £25k a year on capital equip

Please would the author and other parties note that for a small haulier, £25,000 goes nowhere when you need to buy a new HGV wagon. New trucks can cost well in excess of £50,000, with a second hand vehicle three years old still costing £30k - £40k easily.

As a small company employing eight, with nine trucks and three trailers on three to five year replacement cycles, we quite easily spend £40 - £50k per year on new equipment. There will be other small businesses which also have heavy capital commitment costs, so please spare a thought for us when you say that nobody would use an extended AIA.

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By NeilW
28th Jun 2010 10:28

Hardly encouraging investment and job creation is it.

I have to say that once again the rehetoric didn't match the action. Either the chancellor is hard of accounting or when he talks about 'business investment' he is talking hot air.

Slashing corporation tax rates merely encourages corporate profit stripping rather than reinvestment.. If he wanted companies to grow he would *increase* corporation tax rates at the low end, just allow companies to pay tax on the declared profit without any of this silly capital allowance nonsense and most importantly vastly reduce employers national insurance.

Not only that but I can't believe any world corporate makes decisions based on headline rates, so I don't understand where the pressure was coming from.

NeilW

 

 

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By Jekyll and Hyde
28th Jun 2010 10:49

I agee with the trucker

Its good to have a non practising accountant coment on here and it, for me was spot on. Other service sectors that will ultimately suffer are printers, small plant hire companies, or shall we say any sector that has machinery at the heart of its service.

The AIA was the only good thing to come out of recent budgets, and it has now effectively been taken away from many small BUSINESSES.

If I was more cynical, i would say that the government are trying to make it harder for the smaller business to set up and to continue to exist. Perhaps more small businesses will end up selling to medium size businesses and the only small business will be sub-contractors as their will be now employment.

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By abelljms
28th Jun 2010 11:02

FYA reduction

 

 

Why does everything have to re-named by the gonks that run our lives. What does it achieve? Ann Inv Allc = FYA in English?

Anyway I think reduction in AIA from 100k to 25k is a BAD idea as the reason for increasing it was to give small businesses the incentive to invest in things that make things. Which is really the only way this country will get out of recession, not by upping the government payroll or building more call centres.

 

Obviously FYA should only be available to businesses spending the dough themselves, so you don’t allow all the sly tax schemes using leasing arrangements which divert the FYA to the despicable banks etc, but that is not too hard to do.

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By abelljms
28th Jun 2010 11:09

FYA going too low

 

 

 

  It’s like making suits for average sizes – no one exists that actually IS average because it’s an average!  Same with Darlings waffle about 98% of businesses don’t need a higher FYA, it ignores the fact that within that there are probably 20% of the number of businesses would be incentivised by a higher limit to get out there and INVEST for the future etc….  One day they will appoint a technocrat as Chancellor and all will be perfecto…… 

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By Nick Graves
28th Jun 2010 11:17

Very good points

made here.

As for Chesterfield, I would have believed that of the last regime, but I thought the new order wanted to create new small businesses? I have a lot of sympathy for those needing to spend hundreds of thousands on a new rig or coach, only to get tax relief when the thing is old and if they've lasted that long!

For years, we had a fairly stable regime of a FYA (I've got another acronym for what the gonks can go & do!) and a 25% WDA. Of course like your wicked Uncle Ernie, chancellors cannot resist 'fiddling around' any more.

In the grand scheme of things, does it actually ACHIEVE anything?

 

 

 

 

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By abelljms
28th Jun 2010 11:17

reduction in mainstream CT rate

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I do agree about the reduction in mainstream CT rate

– an ideal would be 20% long-term for small companies

– 25% for those up to £1bn. profits

– 30% on the top bit to cane banks and oil companies

 

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The reason for doing this is to get the headline rate down for international comparisons and encourage businesses to stay in UK etc..               but it will never happen

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