TT166: Short Life Assets

August 23, 2011

One of the many quirks of the tax system is that tax allowances for Plant & Machinery often do not reflect the economic life of the asset.

And the position is about to get worse as the Government reduces these tax allowances.

A business gets tax relief for the cost of P&M through Capital Allowances which spread the cost over a number of years.

From April 2012 the rate of Capital Allowances falls to just 18% per annum on a reducing basis. It wasn’t that long ago that the rate was 25%.

So machinery costing £10,000 will get £1,800 allowance in year one, around £1,480 in year two and so on. Around £8,000 of allowances over eight years.

But suppose the machine was worn out after 4?

Normally, there was nothing the business could do as the cost of the machine would go into a “general” pool of expenditure and tax deductions would lag years behind the actual costs.

The Government have recognised this in the past by introducing the ‘Short Life Asset’ rules, which meant that P&M with an expected life under four years could be looked at in isolation.

If it wore out after three years a business would get the balance of the cost as a tax deduction in the year the P&M wore out.

But there were two problems.

  • The first was the relatively short four year period. P&M lasting longer couldn’t benefit.
  • The second was that an election had to be made for each asset and each asset had then to be tracked.

All very well for a £100,000 machine if it fell to pieces after three years (!) but not reflecting that most expensive assets last longer and many cheaper assets would be too costly and difficult to monitor.

However, there are two solutions to these problems, one announced recently by the Government and the other buried away in H M Revenue & Customs own manuals.

The first is that the four year period will be extended to eight years and the second is that if a convincing case is made to HMRC, they will accept a Short Life Asset election for a ‘group’ of similar assets.

If, for example, a restaurant chain bought thousands of plates a year, it would be impossible to keep track of them all but it is possible to agree negotiate with HMRC that each year’s expenditure is treated as an asset that will last (say) three years.

So the full cost can be set off against tax over the real economic life of the asset.

So who can benefit?

Any business which spends a lot of money on assets which they expect to last less than eight years should seriously consider Short Life Asset elections to speed up tax deductions and improve cash flow.

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