Changes to Capital Allowances

The system of capital allowances has seen significant changes from April 2012, especially in the amount of expenditure on plant and machinery which qualifies for a 100% year one write-off via the annual investment allowance (AIA). The changes inevitably have an impact on many businesses, especially those facing a need to invest substantial amounts in plant and machinery. This factsheet provides an overview - please contact us for help and advice.

Recent changes

The maximum amount of the annual investment allowance (AIA), attracting 100% relief, was temporarily increased to £250,000 from £25,000 for the period from 1 January 2013 to 31 December 2014. Budget 2014 extended the period of the temporary increase to 31 December 2015. It further increased the maximum amount of the AIA to £500,000 from 1 April 2014 for corporation tax and 6 April 2014 for income tax to 31 December 2015.

Second Budget 2015 reduced the AIA to a permanent level of £200,000 (instead of the temporary level of £25,000 previously announced) with effect from 1 January 2016.

Where the accounting period spans 31 December 2015, the maximum amount of AIA entitlement is calculated on a pro-rata basis (see example below).

For example, if Asset Ltd's accounting period begins on 1 April 2015 and ends on 31 March 2016, approximately three quarters of that period would fall before the date of change (1 January 2016) and approximately one quarter would fall after that date.

Transitional AIA

Asset Ltd will be subject to a transitional AIA maximum, calculated as follows:

Dates
Fraction of period
Allowance for full year
Transitional allowance

01/04/15 to 31/12/15

9/12

£500,000

£375,000

01/01/16 to 31/03/16

3/12

£200,000

£50,000

 

Transitional AIA maximum

£425,000

An unpleasant surprise?

Asset Ltd may have planned to buy machinery worth £500,000 in December 2015 in order to make use of the current £500,000 AIA limit. However, the calculation above shows that the amount of AIA which may be used against expenditure incurred in the whole of the year to 31 March 2016 is limited to £425,000. The effect is that capital allowances on the purchases will arise as follows:

 
 
 
 
Allowances
for year
        £
Year to 31 March 2016 - transitional AIA  
 
 
 
425,000
         
Balance allocated to main pool
 
 75,000
 
 
WDA Year to 31 March 2016
18%
(13,500)
 
13,500
 
 
 
 
438,500
====
WDV b/f  
 
61,500
 
 
WDA Year to 31 March 2017 
18%
 (11,070)
 
11,070
==== 
WDV b/f   
 
50,430
 
 
WDA Year to 31 March 2018
18%
(9,077)
 
9,077
====
And so on for many years on a reducing balance basis

Is there an alternative?

It is clear that the result for Asset Ltd is far less favourable than was intended, but what alternatives are there?

The only obvious, though drastic, alternative would be to change the accounting period end to 31 December 2015 from 31 March 2016. The purchase in December 2015 would be in an accounting period which does not contain any changes in the AIA maximum. There could, however, be repercussions in terms of additional cost and possible advances of tax liability.

Anti-avoidance legislation

The capital allowances anti-avoidance legislation denies AIA and FYA, without exception, where there is a sale or hire purchase of plant or machinery if either:

(i) the buyer and seller of the plant or machinery are connected, or

(ii) the transaction was put in place solely or mainly to get the benefit of capital allowances, or

(iii) the plant or machinery was sold and then leased-back to the seller and the seller continues to use the plant or machinery for the purposes of a qualifying activity.

If you intend to invest in your business and want to discuss the impact of capital allowances on your plans, please contact us.

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