May 2007

All Change for Capital Allowances

The system of tax reliefs on expenditure on equipment in your business is a complex one. Broadly when you buy a piece of equipment to use in your business you normally cannot set the full cost against that year’s profits, unless the value of the item is quite small, or a special tax relief applies. The cost of more expensive items is written off against profits over a number of years, using the capital allowances system.

From April 2008 it is proposed that up to £50,000 spent on equipment in one year by any business will be set-off in full against the profits for that year. This allowance should cover most items of plant and machinery purchased by smaller businesses, although cars will not be included in this total. Where the expenditure on equipment exceeds £50,000 in one year the excess will be written off at a rate of 20% per year.

The principle of giving relief over a number of years has also applied for expenditure on certain industrial or agricultural buildings.

The capital allowances that are currently available for the cost of buildings will be phased out by 2011, and the changes apply for any alteration in ownership of those buildings from now on. Where equipment is fixed in a building used for your business, you can currently claim 25% of the remaining cost each year against profits. This will be reduced to 10% per year from 2008.

Up until April 2008 the old system of capital allowances largely remains in place, except small businesses can claim a 50% first year allowance for the cost of new equipment purchased before 1 April 2008 by companies, or before 6 April 2008 by unincorporated businesses.

The tax savings are potentially high. Please get in touch if you are planning additional expenditure on equipment or premises.

Internet Links:

HMRC Budget notice and HMRC Capital allowances reform