The following is a summary of the main measures affecting capital allowances that came out of the recent Budget. There isn’t a great deal to say, though the increase in the annual investment allowance for plant and machinery expenditure will certainly be welcome.
In our introductory article we concentrated on plant and machinery, as this is the most common type of allowance. However, we also mentioned that there are other types of allowances available – we shall encounter some of these in the following summary.
From April 2014, the Annual Investment Allowance will be increased from the current level of £250,000 to £500,0001. This applies to both corporate and individuals whether trading as a sole trader, or in partnership.
The increase is temporary – as was the previous £250,000 figure. This will apply until 31 December 2015 after which the allowance will drop back down to £25,000.
This is a welcome increase for businesses investing in plant and machinery. In the absence of the annual investment allowance, tax relief is normally given at rates of 8% or 18% on a reduced balance – but for capital expenditure falling within the annual limit, the entire amount can be written off in a single year. Businesses should consider accelerating any investment plans to take into account the fact that the increase is temporary.
This is an allowance that is given for bringing back business premises back into use after they’ve been dormant for over a year2. The costs are relieved by way of a 100% writedown3, which makes it a valuable relief compared to the writing down allowances for plant and machinery. This tax break is an incentive for urban regeneration schemes – to qualify for the relief, the building must be located in a disadvantaged area.
The scheme is intended mainly for the conversion and renovation costs of a building – “bricks and mortar” costs. However, there was some concern last year that certain people were claiming for a wider area of expenditure, such as those costs associated with marketing the property as a potential investment.
The legislation will now be tightened to ensure that it is only the direct costs associated with bringing the building back to life that will qualify for the relief, together with a certain related costs for professional services such as architectural and surveying services.
A series of other measures will be enacted:
- A claim for the relief will not be permitted if another form of State aid has or will be received;
- The proposal to limit qualifying plant and machinery to integral features has been widened to cover additional listed items;
- The rules on preventing relief in relation to buildings before they have been unused for a year will be clarified;
- Where relief is claimed for advance expenditure, the relevant renovation work must be completed within 36 months, or else the relief will be withdrawn;
- The period in which a clawback is liable to occur – for example where the building is sold before the period expires – is to be reduced from seven years to five. (Clawback is a user friendly name for “balancing adjustment”).
Something to delight those in the fracking business. This is a new measure that will ensure that the costs of a successful planning permission will be treated as expenditure on mineral exploration and access rather than as expenditure on acquiring a mineral asset.
Why is this so important? Because acquiring a mineral asset gives rise to allowances at the measly 10% rate, whereas mineral exploration costs benefit from the 25% rate4. Note however that ring-fence trades qualify for the 100% first year allowance5.
The ECA scheme allows companies investing in plant and machinery in a designated Enterprise Zone to obtain a 100% write off6. The scheme is due to expire on 31 March 20177 – this will now be extended to 31 March 2020.
And finally, a measure aimed at tech companies:
A targeted anti-avoidance rules came into force last year to restrict the deduction of tax losses when there is a change in ownership or control of a company. The restriction is not automatic, as there is a tax avoidance test that needs to be satisfied 8. However, HMRC considers that the rules have an unintended impact when the losses include an element of R&D spending.
The rules catch situations where a company does preliminary R&D work but doesn’t actually start trading, before it is sold on to another company. Before the loss buying rules were introduced, the buyer would have been able to use the R&D allowance – this position has now been restored.
(Note that this is directed at the R&D allowance which is for capital investment, and not the R&D tax credit which concerns revenue expenditure.)
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