Confirmation of proposed reforms
The proposed reforms of the capital allowances system are set to proceed broadly in line with the consultation, with no major surprises. This confirms the Government’s unpopular decision to phase out industrial buildings allowances and agricultural buildings allowances over a four year period. Enterprise zone allowances will also be withdrawn from April 2011, and will not be subject to the phasing out rules. Although balancing adjustments have already been withdrawn for industrial buildings allowances, balancing charges relating to enterprise zone investment will be retained for a limited period. The new capital allowances regime gives rise to winners and losers and businesses should be looking at their capital investment programmes to determine how they will be affected. It may pay to accelerate some expenditure, or to defer it, depending on the type of asset to be acquired.
It pays to go green
Investment in environmentally friendly assets continues to attract enhanced rates of relief. This will be particularly important since small and medium sized enterprises will lose their first year allowances, with only the first £50,000 of expenditure attracting relief on most plant and machinery under the new annual investment allowance. In particular, the following additional incentives have been announced in the Budget:
• 100% first year allowance on expenditure on natural gas and hydrogen refuelling equipment will be extended for an additional five years to 31 March 2013, and will also include refuelling equipment for biogas;
• 100% first year allowances for expenditure on low CO2 emission cars will also be extended to 31 March 2013 – but only cars with emissions not exceeding 110g/km driven will attract the 100% relief;
• Energy efficient and water saving equipment on lists published by Defra will attract 100% relief. Water waste recovery and reuse systems will be added to the Water Technology List and compressed air master controllers, compressed air flow controllers, heat pump dehumidifiers and white LED lighting will be added to the energy efficient list, thus expanding the categories that attract relief at 100%.
Loss making companies (but not unincorporated businesses) will also be able to surrender tax losses arising from capital allowances on energy efficient and environmentally friendly equipment which appears on the lists published by Defra. This ‘first year tax credit’ will be paid at 19% of the loss surrendered, subject to an upper limit of the greater of the company’s PAYE and NI liabilities for the period or £250,000.
However, thermal insulation of buildings (other than residential property) will only attract relief at 10% instead of the current 25% relief for industrial buildings. However, thermal insulation in property that did not qualify for industrial buildings allowances (such as offices and shops) will be advantaged.
More anti-avoidance rules
An anti-avoidance provision is to be introduced which is aimed at curbing the artificial generation of balancing allowances where a trade is sold from one group company to another. This will apply where the trade has previously been sold into a profitable group that has no long-term interest in the trade, and where the main purpose, or one of the main purposes of the arrangements, was to create a balancing allowance. It remains to be seen how widely this provision will be invoked, as a new group acquiring a trade and then deciding that it is non-core, could be disadvantaged. It will be advisable for groups to maintain evidence documenting the commercial rationale for divestments in these circumstances to support their capital allowances claims.
A further anti-avoidance provision is to be introduced to curb schemes which have sought to exploit the withdrawal of balancing adjustments on industrial buildings in order to claim multiple allowances on the same property. Where an industrial building is transferred between connected persons, the amount of allowances that can be claimed will be time apportioned where a main purpose of the sale or transfer is to obtain a tax advantage.
