TT173: Changes To Capital Allowances

Businesses can get annual investment allowances at 100% in respect of plant and machinery acquisitions and currently the financial limit (subject to adjustments for certain related entities) is £100,000 per annum, having increased from £50,000 per annum on 1st April 2010 (all references to 1st April are in respect of corporates and should be read as references to 6th April in respect of non corporates).

On 1st April 2012 the financial limit for annual investment allowance will be reduced to £25,000.

However, for businesses with accounting periods straddling the date of change, particular care might be needed if the availability of this valuable relief is not to be squandered.

This is because of how the changes are being made.

For periods straddling 1st April 2012, the allowance is a simple pro ration of the limits applicable pre and post the change, but the limit is a strict one after the date of change in a way that can give some rather counter-intuitive results.

For example, suppose a company had a year end of 30th April. In its year ended 30th April 2012 it would have available annual investment allowance as follows:

(11/12ths) x £100,000 + (1/12th) x £25,000 = £93,750

If the company were to invest in plant costing £93,750 during the any of the first 336 days of its (leap) year, the whole amount would attract relief at 100%.

However, if the expenditure were delayed until after 31st March, the 100% allowance would be available on a mere £2,083, leaving £91,667 to be relieved as a pool item at a rate which itself falls from 20% to 18% (reducing balance) at the same time.

The message is clear in that any plant acquisitions which are currently planned should be advanced so they can be made before 1st April 2012, where a delay after that date would lead to a significant fall in the amount of available allowances.

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