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Reductions in rates of relief for capital expenditure

Most of the bad news for businesses in this budget concerned the reduction in the reliefs available for capital expenditure incurred by businesses. The only small crumb of comfort is that the reductions in the rates of relief are not going to be introduced until 2012.

The main rate of allowances is to fall from 20% to 18% and the special rate falls from 10% to 8%. By way of example, at the current 20% rate of allowances, £10,000 of expenditure will write down by £6,723 after 5 years whereas the 18% rate will produce a write down of £6,293. The special rate effect is more emphasised. The same £10,000 of expenditure is reduced by £4,095 after 5 years at the 10% rate but only £3,409 at 8%.

The other significant removal of allowances is a 75% reduction in the annual investment allowance (AIA). This stands at £100,000 currently but will reduce to £25,000 from 1 April 2012. The AIA is a significant relief as it allows 100% tax relief on capital expenditure in the year of spend. Its withdrawal will therefore have long term cash flow impacts on capital intensive businesses in particular and it is unlikely to be offset by the falls in the small company rate of corporation tax announced today.

Businesses must not forget however that there remain 100% tax write offs for enhanced capital allowances on certain types of “green” and environmentally friendly plant and equipment. You should always investigate the possibility of claiming these reliefs if you are able to acquire fixed assets that meet the qualifying conditions.

A new addition to the list was announced today in that new zero emission goods vehicles will qualify for a 100% first year allowance (effectively a tax write off in the year of spend). In this case, the 100% allowance will be available on any new (unused) zero emission goods vehicles bought after 1 April 2010 but before 1 April 2015.

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