Capital Allowances for fixed asset expenditure – a brief recap!
[Note that much of the information below has since changed following subsequent announcements – please check more up-to-date posts]
A raft of tax changes is expected to be announced in the emergency budget scheduled for 22 June 2010 including potential changes to tax relief on capital expenditure – such tax relief is referred to as “capital allowances” in the UK tax code.
“Capital expenditure” means expenditure on fixed assets such as laptops, PCs. equipment, furniture, cars, vans etc, generally anything that you buy and intend to use for at least a couple of years in your business.
So if I spend £1,000 on a new laptop for my business, I would receive tax relief in the form of capital allowances rather than deducting the cost directly from my profits in the year.
The Conservative Party has previously expressed a wish to “simplify” the corporation tax regime and therefore the elimination of the wide and varied tax system of capital allowance reliefs could be a drastic yet possible option.
In the meantime, let’s recap on where we are now for UK capital allowance purposes (so you can see how simple it already is :)):
- Annual Investment Allowance – this will cover the majority of annual capital expenditure for most UK businesses. The annual investment allowance (or ‘AIA’ as us tax folk affectionately call it!) was increased from £50,000 per year to £100,000 with effect from April 2010. So pretty much any capital expenditure incurred (except buildings and cars) gets allocated to the AIA and you get 100% tax relief in year one. You only get one AIA to spread amongst the group if there’s more than one company. AIA applies for companies, partnerships (be careful who the partners are) and sole traders.
- Enhanced Capital Allowances (or ECAs – see what we did there again?!?). Good if you can get them as ECAs attract 100% tax writing down allowance in year one plus if the company is loss-making in the year and purchases qualifying ECA assets then the company can claim a cash tax refund from HM Revenue & Customs. Qualifying assets include water conservation kit and certain plant & equipment that reduces CO2. You can find the precise list of qualifying assets at www.eca.gov.uk. Certain cars also qualify for ECAs – those with CO2 emissions less than 110 g/km (at the moment although this keeps being revised downwards).
- Short Life Asset elections (‘SLA’) – ideal for assets purchased which are scrapped or sold (for not a lot) less than 5 years after acquisition. Speeds up tax relief compared to the General Pool (see below). Downside is that the tax calculations and monitoring of each asset can become hideously complex and time-consuming plus it does not apply for cars or buildings.
- General Pool – anything over and above the AIA, ECA, SLA pools get allocated to the General Pool. Try to minimise the amount that gets allocated to the General Pool as relief is slooooow – typically about 20+ years to get full tax relief even if you trashed that pc some 18 years earlier. (Trash being the operative word!). Tax relief in the General Pool is received at a rate of 20% reducing balance hence its lack of speed of relief. Best avoided where possible – ideally with a bit of nifty tax planning.
- Special Rate Pool – don’t be fooled by the name! Its not special in a good way – although it has at least opened the door for tax relief on more assets than was available before its intro in 2008 – as tax relief is obtained at just 10% reducing balance (who knows where we’ll be by the time you get full relief under this….!). Aimed primarily at integral features within buildings (e.g. lighting, elevators, air con, lifts etc) it also includes ‘naughty’ cars (see below).
- Cars – used to have their own regime (for cars costing more than £12,000 bizarrely being referred to as ‘Expensive Cars’!) and still do to an extent although they are being subsumed within the above capital allowance classifications based on the specific CO2 emissions. So the ‘good’ cars with low emissions get 100% relief; the middling cars get General Pool treatment at 20% and the bad boys get 10% relief in the special rate pool.
- Buildings – nowt, nada, nothing, diddly-squat. Gordon Brown pulled the plug on Industrial Buildings Allowances (‘IBAs’) in 2006 with relief being phased out by 2011.
So there it is – a whirlwind tour of UK capital allowances as they stand today. No sooner than you’ve digested this, I fear that George Osborne will stand up on 22 June 2010 for his Budget announcement and either scrap most / all of it or at the very least tinker (they can’t help themselves!).
Welcome to my world…..
(P.S. If you feel that a ‘capital intensive’ t-shirt would be apt for your loved one or little bundle of joy then click here!)