Active Business Series - Capital Allowances Feb 2012
Active PrActice UPDATEs FeBrUArY 2012 plummerparsons apfeb2012-euCapital allowancesWhat is a capitalallowance? Business UPDATEIf you buy an asset to use in your businessthat has a life of more than two years, you Example: You buy an asset for £300,000 that qualifies for £100,000 annual investmentmay not be able to deduct the whole cost allowance and a writing down allowance at 20 per cent a year.from that year’s profits. Instead you mayget tax relief over several years as capital Cost: £300,000allowances. Year 1 Annual investment allowance (£100,000)There are several types of capital allowance. 20 per cent writing down allowance on £200,000 (£40,000) Written down value £160,000Since 2008, there has been an annualinvestment allowance (AIA). The amount Year 2 20 per cent writing down allowance on £160,000 (£32,000)reduces from £100,000 a year to £25,000 Written down value £128,000from 1 April 2012 for companies, and Year 3 20 per cent writing down allowance on £128,000 (£25,600)from 6 April 2012 for individuals and Written down value £102, 400partnerships. and so on.If all your assets come within this allowance,you may (with a few exceptions) deduct the For what items may capital allowances be claimed?whole cost from the taxable profits of the yearin which you acquired the asset. In practice, most capital allowances are concerned with plant and machinery. However capital allowances can also be claimed for these items.There are a few environmentally-friendly • renovation of business premises • patents and know-howassets where you may be able to claima 100 per cent first year allowance. This • research and development • dredgingmeans that, again, you may deduct the • mineral extraction • cemeteries and crematoria.whole cost from taxable profits. The government has also announced that there will be some special capital allowances forHaving considered these allowances, there enterprise zones in assisted areas.is usually a writing down allowance whereeach year you can claim a portion of what For capital expenditure, an allowance can only be claimed if it comes within one of theseis left. categories.18 Hyde Gardens www.plummer-parsons.co.ukEastbourne BN21 4PT01323 431 200 email@example.com
Capital allowancesso what is plant and Bringing expenditure We can advise you on how to minimise both tax liabilities if considering buying a car.machinery? forwardMachinery is any device with moving parts. It may be possible to save tax by bringing Tax planning usingIt does not have to have to be connected forward spending on assets, particularly now capital allowancesto any form of power, so, for example, a that rates of corporation tax are reducing:locking mechanism is machinery. £100,000 of capital allowance is worth There are many ways in which capital £26,000 when the main rate of corporation allowances may be used to reduce your taxPlant is equipment with which you conduct tax is 26 per cent, but only £23,000 at 23 liability.your business. This definition comes from a per cent.case of 1887 which held that a wharfinger’s How capital allowanceshorse was “plant”. You do not have to take the whole capital allowance. It is possible to take a lower may reduce your taxThere have been hundreds of cases onexactly what constitutes plant with which a amount in one year so more can be claimed in liability later years. • Bring forward expenditure to maximisebusiness is carried out as against premises inwhich a trade is conducted. The answers are If you borrow money to pay for an asset, the relief before tax rates reducenot always obvious. For example a dry dock loan relationship tax rules may need to be • Allocate the annual investmentwas held to be plant. Similarly, in 2011, it considered. allowance to assets with a lower rate ofwas held that a gazebo in a pub garden writing down allowancefor smokers was plant. Statutory guidance is What about buildings? • Don’t claim the full allowance when thisgiven in an Act of 2001 on a range of items could restrict loss relieffrom advertising hoardings to zoo cages. You can no longer claim for industrial or • Consider using environmentally-friendly agricultural buildings themselves. But from 1 assets and low emission carsCalculating entitlement to April 2008, it is possible to claim plant capital • Make an election for short-life assets not allowance for features integral to a buildingcapital allowances (FITAB). This includes such items as electrical to be put in a pool systems, lifts and air conditioning. • Claim as much as possible as plantFor the writing down allowance, plant and rather than premisesmachinery is either included in a ‘pool’ or When a property is sold, the purchaser andhas its allowances calculated separately. • Agree a figure for features integral to a seller should agree the figure attributable to building when buying premises. FITAB.There are two types of pool: the main pooland a special rate pool. The rates until 1/6 What about cars? Please ask for ourApril 2012 are 20 per cent and 10 per centrespectively. From 1/6 April 2012, the rates Cars are plant and machinery but have some adviceare 18 per cent and 8 per cent. special rules. You should not buy something just to claim the capital allowance. You show only buyAn asset is not put in a pool if it is either a If a car has exhaust emissions below 110 g/ something because you can commerciallylong-life asset or a short-life asset. km, and is new and unused, it qualifies for justify buying it. However considering capitalLong-life assets are those with an expected a 100 per cent first year allowance and so expenditure and the entitlement to claimlife of 25 years or more. Long-life assets must you may deduct the whole cost from taxable capital allowances can save you tax.be included in the special rate pool. profits. While this update is somewhat technicalShort-life assets are those with an expected For higher emissions, the car attracts the higher in its content it is intended to provide anlife of up to eight years (four years before rate of capital allowance for emissions up to update regarding important areas of tax and1/6 April 2011), although these may be 160 g/km, and at the lower rate for emissions business planning. By its nature, this updatekept in the pool if you wish. The advantage above this figure. provides a generic overview so do pleaseof making a short-life asset election is that ask for us for personal advice specific to If a car has higher emissions and is boughtif you dispose of an asset which still has a your circumstances. for leasing, a capital allowance may only bewritten down value, you may also be able to claimed for 85 per cent of its cost. Please note that the rules relating toclaim a balancing allowance. capital allowances may change in the 21 It should also be noted that if the car is to beA pool that is written down each year never March 2012 Budget announcements. used as a company car, the employee couldreaches zero. To avoid small figures, the law be liable to pay tax on the benefit. The amountnow allows a pool to be wholly written off if is also influenced by the car emissions.its value falls below £1,000.