TT29: Capital Expenditure Planning

Every year the Chancellor of the Exchequer announces changes to the way that businesses obtain tax relief on their plant and equipment. The general rule is that the cost of plant is relieved against taxable profits by a writing-down allowance of 25% of the initial cost in the first year, and 25% of the remaining balance in each subsequent year. Special first year allowances exist to encourage businesses to invest in certain types of plant as follows:

Rate of first year reliefSmall businessMedium businessLarge business
Information and communications technology100%YesNoNo
Other plant and machinery40%YesYesNo
Certain energy saving plant and equipment100%YesYesYes

(The definition of business size is as per the Companies Act 1985. Furthermore, a business must not be a member of a group that exceeds the size criteria.)

Warning – the 100% first year allowances for information and communications technology are only available on expenditure up to 31 March 2003. There is no certainty that they will be extended beyond this date by the Chancellor.

New reliefs

Enhanced capital allowances are being introduced to extend the 100% relief for certain energy saving plant and equipment to three key areas:

  1. Further energy saving technologies – available for expenditure after 5 August 2002 (seehttp://www.eca.gov.uk for the government’s detailed list).
  2. Improving water use and water quality.
  3. Cleaner vehicles and fuels (see below).

The biggest effect on many businesses may be in relation to expenditure on cleaner vehicles and fuels. Cleaner cars are those registered on or after 17 April 2002 with CO2 emission ratings of no more than 120gm/km or are electrically powered. Relief will also be available for equipment for refuelling gas or hydrogen powered vehicles.

Barnes Roffe Topical Tips

  • Consider advancing planned investments to before your year end to obtain maximum relief at the earliest opportunity (rather than investing just after your year end and delaying relief by another 12 months). This is especially the case where businesses qualify for first year allowances
  • Businesses that qualify for first year allowances that are due to expire should consider making investments in qualifying information and communications technology before the first year allowances cease (31 March 2003)
  • Review investments in vehicles for potential fleet vehicles that qualify under the new rules for immediate 100% relief
  • Consider identifying and treating separately within your tax computation any plant that you consider having a life of less than 4 years. This will result in you obtaining earlier relief for the balance of cost unrelieved against tax when the asset is disposed of. This election can be made within 2 years of the accounting period ending in which the plant was bought, so think about reviewing the last two years’ accounts now
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