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Introduction »
Short life not short thrift
Some unwelcome capital allowance reductions are set to come into operation from April 2012 but it's not all bad news…
First the bad news
The Annual Investment Allowance (AIA) provides 100% relief on qualifying plant and machinery expenditure but it is to reduce from £100,000 to just £25,000. Further, the main writing down allowance (WDA) which applies generally to any expenditure in excess of the AIA in the current period (or brought forward from previous accounting periods) will reduce to 18% annually from the current rate of 20%. This means lower tax relief on expenditure in the period of acquisition and delayed relief in later years for both unincorporated and corporate businesses.
But it gets better
One way of obtaining more capital allowances earlier is to make a ‘short life asset (SLA) election’. This facility has been available for many years but the 2012 changes and an announcement in Budget 2011 has put the SLA back on to centre stage.
Up until now it has been possible to make a SLA election on most assets with an expected useful life to the business of four years or less from the end of the accounting period of acquisition. Fast moving technology like computers would be a good example of a potential SLA. However, cars are specifically excluded from SLA treatment. Such an election means that the asset is placed into a single asset pool for capital allowance purposes. Initially it is eligible for the same allowances (AIA and WDA) as would have applied if placed in the main plant pool. However, on disposal, where there is an unrelieved balance of expenditure, an extra allowance can be claimed. This equates to writing off the whole cost of the asset over its economic life to the business. In fact, a SLA election should only ideally be made on assets which are likely to lose value quicker than they receive tax relief. This is because where assets hold their value well this could result in a clawback of some or all of the tax relief given.
Many small (and possibly medium too!) businesses have not found it advantageous to make SLA elections on additions since April 2008 due to the availability of the AIA. Most small businesses found that the AIA covered their additions in full, thus full tax relief was obtained in the year of acquisition. The AIA reduction from April 2012 makes the SLA election more attractive to a wider range of businesses.
And better
The lifetime period for SLAs has been extended to eight years from the end of the accounting period of acquisition for additions on or after 1 April 2011 for companies or 6 April 2011 for the self employed. This makes it more useful as it means more assets could benefit from SLA election.
Example
A business purchases qualifying plant for £100,000. It has an estimated business life of 6 years and no scrap value.
- If acquired in the year to 31 March 2012 it would be totally relieved by the AIA and a SLA election would not be worthwhile.
- If acquired in the year to 31 March 2013 and no SLA election is made then total allowances over the 6 year period would be £77,200 comprising the £25,000 AIA and £55,200 WDA over the 6 years. Further tax relief will continue to be obtained in future years after the asset has gone!
- If instead a SLA election had been made on this asset acquired in the year to 31 March 2013, the shortfall still unrelieved in year 6 could have been claimed meaning an extra £22,800 overall.
The best for last
This would be worth a minimum £4,560 in tax saving (based on the current basic rate of income tax excluding any national insurance saving or alternatively the small company corporation tax rate) and significantly more for individuals and companies subject to a higher rate of tax.
If you would like any advice on these changes, or capital allowances in general, please do not hesitate to get in touch.
Introduction »
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