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Buy now to take advantage of short-lived tax allowances

If your business is considering making investments in new plant and machinery, you should do so now while generous tax allowances are still available.

The Annual Investment Allowance (AIA) – a capital allowance which enables business owners to write off 100 percent of their qualifying capital expenditure against taxable profits – is set to be cut from £100,000 to £25,000 from April 2012 (1st April for companies, 6th April for unincorporated businesses).

At the same time, writing down allowances for plant and machinery will reduce from 20 percent to 18 percent for the main pool and from 10 to eight percent for the special rate pool. The special rate pool primarily contains integral features, cars with emissions of over 160g/km and long life assets.

Therefore, failure to seek professional advice and delaying decisions on capital investment could mean that your business falls foul of the changes. This is especially true if your accounting period spans the April changeover date, as AIA relief is time apportioned.

In these cases, the maximum allowance for the transitional period will fall into two parts:

  • The AIA entitlement, based on the £100,000 annual cap, for the proportion of the accounting year falling before the relevant operative date
  • The AIA entitlement, based on the new £25,000 cap, for the portion of the year falling on or after the relevant operative date

As a result, if you are contemplating significant capital expenditure, you should review the timing in order to optimise the tax reliefs available.

Going forward, one further effect of the lower relief rate will be the greater importance placed on the short life asset rules, which were recently doubled from four to eight years.

These rules allow for the wear and tear on any items of plant and machinery, so if businesses expect an item to be replaced within eight years of being purchased, they can elect for it to be treated differently in terms of capital allowances.

This is particularly beneficial if the item is likely to depreciate in value faster than the associated capital allowances claim. When the item is sold or disposed of within the eight-year timeframe and a loss is made, it will result in a balancing allowance and a reduction in tax liabilities.

At TWP, we can advise businesses on how to make the most of the AIA scheme in order to ensure their investments are as tax-efficient as possible. For more information and to plan your capital investments more effectively, please contact us.

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