By ACCA’s budget team
With the government keen to stimulate business, it was somewhat surprising to see a reduction in the main rates of capital allowances and the annual investment allowance limit with effect from 1 April 2012 for companies and from 6 April 2012 for unincorporated entities. These changes were announced in the 2011 Budget and have been incorporated into the draft Finance Bill 2012.
Annual Investment Allowance
Annual investment allowance (AIA) was originally introduced in Finance Act 2008. AIA is available to small and medium-sized entities and entitles them to claim 100% relief on capital expenditure up to certain monetary limits. Since inception, the AIA threshold has changed twice and the appropriate limits are as follows:
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Date expenditure incurred: |
AIA Limit |
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Companies: 1 April 2008 – 31 March 2010 (Unincorporated: 6 April 2008 – 5 April 2010) |
£50,000
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Companies: 1 April 2010 – 31 March 2012 Unincorporated: 6 April 2010 – 5 April 2012 |
£100,000
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Companies: On or after 1 April 2012 Unincorporated: On or after 6 April 2012 |
£25,000 |
If the basis period straddles 1 April for companies, or 6 April for unincorporated entities, the AIA must be time-apportioned accordingly. As a result of the reduction I the AIA limit in April 2012, it is important to understand how the rules will operate where an accounting period straddles that date.
Example:
Giacami Ltd has a year end of 30 September 2012. Its maximum entitlement to the AIA for the period is as follows:
6/12 x £100,000 (Annual limit to 31 March 2012) = £50,000
+
6/12 x £25,000 (Annual limit to 30 September 2012) = £12,500
Total Maximum AIA for y/e 30 September 2012 = £62,500
The maximum AIA that may be claimed in the period is, therefore, £62,500. However, where there has been a reduction in the AIA limit, the amount of expenditure that may qualify for AIA in the component period following the change is restricted looked at in isolation.
So, continuing the example, let us assume that Giacami Ltd acquires a new lorry costing £60,000.
If the lorry was acquired before 1 April 2012, the amount of AIA due for the year would be £60,000.
However, if the lorry was bought on or after 1 April 2012, the amount of AIA due would be restricted to £12,500, with the balance of £47,500 attracting writing down allowance.
An important point to note is that the AIA may be allocated in the most beneficial way.
Example:
Brendan Ltd incurs the following expenditure on plant and machinery during the year ended 30 September 2012:
- 1 January 2012 New lathe (general pool item) £100,000
- 1 February 2012 New lift shaft (reduced rate pool item) £100,000
Brendan Ltd should use its entitlement to AIA against the assets which attract the lower rate of writing down allowance first and claim the higher WDA on the additions to the general pool.
Assuming there are no brought forward capital allowance pools brought forward, Brendan Ltd’s maximum capital allowances entitlement for the year ended 30 September 2012 would be as follows:
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10% |
20% |
Rate of |
Allowances |
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AIA |
Pool |
Pool |
C/A |
Due |
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Lift shaft: |
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Max AIA: |
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6/12 x £100,000 |
50,000 |
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+ |
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6/12 x £ 25,000 |
12,500 |
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Total Maximum AIA |
62,500 |
62,500 |
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100% |
62,500 |
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Balance (£100,000 - £62,500) |
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37,500 |
10% |
3,750 |
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New lathe |
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100,000 |
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20% |
20,000 |
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Total capital allowances |
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£86,250 |
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Enhanced Capital Allowance
100% capital allowances are available on for expenditure on certain categories of new plant and machinery. Details of these are as follows:
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Energy Saving Plant and Machinery |
The equipment be new and meet the eligibility criteria. For further details, click here. |
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Low emission cars |
The car must be new and acquired before 31 March 2013. For further details, click here. |
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Zero emission goods vehicles |
The vehicle must be new and acquired between 1 April 2010 and 31 March 2015 (or 6 April 2010 and 5 April 2015 for unincorporated entities). For further details, click here. |
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Plant and machinery installed at a gas refuelling station to refuel vehicles with biogas, natural gas or hydrogen |
The plant must be new and acquired before 31 March 2013. For further details, click here. |
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Environmentally beneficial plant and machinery |
The equipment must be new and meet the eligibility criteria. For further details, click here. |
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Plant and machinery used in ring-fence (oil exploitation) trades |
For further details, click here. |
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Capital expenditure on Research and Development (Research and Development Allowance (RDA)) |
For further details, click here.
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Business premises renovation allowance |
Available for expenditure on renovated disused or derelict properties in certain disadvantaged areas. The scheme was due to expire on 11 April 2012 but it was announced in the Budget that this would be increased for a further 5 years until 2017. For further details, click here. |
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Flat conversion allowance |
For expenditure on converting unused space above shops and other commercial premises into residential flats. For further details, click here. The government announced in the Budget 2011 that this allowance will be withdrawn “after 2012”. |
Enterprise Zones
As announced in the Autumn Statement 2011, legislation will be introduced in Finance Bill 2012 to provide 100 per cent first-year allowances for trading companies investing in plant or machinery for use primarily in designated assisted areas within Enterprise Zones.
Writing Down Allowances (WDA)
Expenditure on qualifying plant and machinery, which is not eligible for either AIA or enhanced capital allowances is put into a pool of expenditure, on which writing down allowances (WDA) may be claimed.
It was announced in the 2011 Budget and contained in the 2012 draft Finance Bill that the rate of writing down allowances on both the general and reduced rate pools would be reduced with effect from 1 April 2012 (6 April 2012 for unincorporated entities).
There are two separate pools, as follows:
- Main Rate Pool – for expenditure on general plant and machinery
- Reduced Rate Pool - for expenditure on the following:
- integral features of buildings and structures, i.e:
- an electrical system (including a lighting system);
- a cold water system;
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system;
- a lift, escalator or moving walkway; or
- external solar shading
- expenditure on thermal insulation
- expenditure on long-life assets (assets with an expected life of 25 years or more)
- from 6 April 2009, expenditure on certain cars (see below).
The rates are as follows:
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General Pool |
Reduced Rate Pool |
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Up to 31 March 2012 (Up to 5 April 2012 for unincorporated businesses) |
20% |
10% |
|
From 1 April 2012 (From 6 April 2012 for unincorporated businesses) |
18% |
8% |
Hybrid rates will need to be calculated if an accounting period straddles the date that the rate of WDA changes.
Example:
Liberty Ltd has an accounting period of 31 December. What would be its WDA rate for general pool for the year ended 31 December 2012?
3 months @ 20%: 5.00%
9 Months @ 20%: 13.50%
Hybrid rate: 18.50%
If the residual vale of either the general pool or the reduced rate pool is less than £1,000, a writing down allowance equal to the full amount of the pool may be claimed.
Business Cars
The rate of capital allowances which may be claimed on cars are dependant on the car’s CO2 emissions of the cars. The car will either be eligible for 100% first year allowances (FYA) or will go either into the general or reduced rate plant and machinery pools, as follows:
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CO2 emissions of the Car: |
Capital allowances |
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Cars with CO2 emissions of 110g/km or less |
100% FYA |
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Cars with CO2 emissions of between 111g/km and 160g/km |
General Pool |
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Cars with CO2 emissions of 161g/km or more |
Reduced rate pool |
Long Life Assets
Long-life assets are defined as assets with a useful economic life of 25 years or more. The rate of writing down allowance is changing with effect from 1 April 2012 (6 April 2012 for unincorporated businesses) and the rates are as follows:
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Up to 31 March 2012 (Up to 5 April 2012 for unincorporated businesses) |
10% |
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From 1 April 2012 (From 6 April 2012 for unincorporated businesses) |
8% |
Long life assets are pooled with other reduced-rate assets in the reduced rate pool.
Remember, you can see ACCA’s budget blog from yesterday, here
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