TT119: Plant & Machinery Tax Relief
n the March 2008 Budget, the Chancellor introduced a new form of first year allowance (FYA) for businesses that buy plant and machinery for use in their trade.
The old rules
Previously, a complex system existed under which medium-sized businesses* could claim accelerated tax relief in the accounting period in which they purchase plant and machinery. Assuming that the business qualified (for example, leasing businesses were excluded) and the plant and machinery qualified (motor cars, ships and long-life assets were excluded), then the business could claim 40% of the cost in the period against their taxable profits. Subsequently, 25% of the remaining pool of expenditure could be claimed against profits in successive accounting periods (on a reducing balance basis). Small businesses* were allowed to claim 50% in the period of acquisition.
In earlier years the FYA had been at different rates to incentivise certain types of expenditure. For instance, until 31 March 2004, 100% relief had been allowed on computer equipment purchased by small businesses*.
*As defined by the Companies Act size limits
The new rules
With effect from 1 April 2008 expenditure by trading companies will obtain a different form of FYA – known as the Annual Investment Allowance (AIA).
In general, a Qualifying Person can claim the AIA at 100% on the first £50,000 of Qualifying Expenditure in an accounting year. Plant and machinery additions in excess of this will get relief at a new, lower rate of 20% (but see below). The annual allowance on the reducing basis is now restricted to 20%. However, qualification for this new AIA is different from the preceding FYA rules,
Qualifying Person – a business must be a qualifying person, i.e. a sole trader (an individual), a partnership or a company. However, a partnership must be made up of only individuals in order to qualify, hence if it has a company as a member it will not be able to claim the relief. The AIA is available to all trading entities, regardless of size.
Qualifying Expenditure – this cannot include a car and also businesses that lease out their assets cannot claim the relief (as per the old rules). The equipment must be used in the trade of the business. If an entity has more than one business activity then the AIA can be allocated amongst the equipment purchased as the business requires.
A group of companies can only claim one AIA. The group can allocate the AIA amongst the group’s expenditure as it sees fit.
Companies that are related and under common control can only claim one AIA between them. The same applies to groups of companies that are also related and under common control. To be ‘related’ the companies would have to either share premises or have similar activities. Hence an individual owning, for example, two separate companies, one a retail food business and the other a travel agency, could claim two sets of AIA.
Similar rules exist for trading entities that are not companies.
Accounting periods that straddle 1 April 2008 will need to record the date they bought the plant and machinery, as this will determine whether the old or new rules apply to the expenditure. For periods post 1 April 2008 that are less than 12 months, the limit of £50,000 is scaled back pro rata. Similarly it is scaled up for longer periods.
Other rates of allowance
There has also been introduced a new, lower rate of allowance of 10% for plant and machinery which is ‘integral to a building’. Some assets will now only benefit from this lower rate (e.g. installed air conditioning or lifts), but general lighting will now attract this relief, whereas it previously did not qualify for any. This applies to all purchases post 31 March 2008.
Certain plant will attract more advantageous allowances of 100%, such as: low emission cars and refuelling equipment; energy-saving plant or machinery; and environmentally beneficial plant and machinery. See www.eca.gov.uk for details.
Barnes Roffe Topical Tips:
- Detailed computations are best handled by your accountants as part of usual tax compliance work.
- Consideration should be given to rescheduling capital expenditure to ensure the business is able to claim the maximum 100% relief in each accounting period.
- The above is a summary of the rules, if you have any questions then please contact your Barnes Roffe partner.