This article was first published in the November 2011 edition of Accounting and Business magazine.

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In the world of capital allowances it is all too evident that there has been a change of government.

The previous government used capital allowances to promote spending. The current government prefers a more direct approach, with a reduced corporation tax rate, hence the change of direction. The reduction in capital allowances has helped reduce the rate of corporation tax.

The ultimate losers are unincorporated entities not subject to corporation tax. Could this be a reason to incorporate?

So what has changed, what has gone and what has come in?

Buildings allowances

Industrial buildings allowance (IBA) and agricultural buildings allowance (ABA), both of 4%, which were available prior to the changes in April 2008, have been phased out. Both allowances will be unavailable after 31 March 2011 for companies and 5 April 2011 for unincorporated businesses.

Enhanced capital allowance

This 100% allowance is available for environmentally beneficial plant and machinery. Examples include water efficiency systems, energy-saving heating and low-emission cars (see following page for details).

Long-life assets

From 6 April 2008 (1 April 2008 for unincorporated entities) assets with a life expectancy of more than 25 years will receive 10% capital allowances, reducing to 8% from April 2012. As with the writing down allowance (WDA), a hybrid rate will apply for transitional periods for long-life assets, if appropriate.


A 100% business premises allowance is available for renovation of commercial premises that have been unused for 12 months and are in a designated postcode. This useful deduction will be phased out from April 2012.

A 100% qualifying flat allowance is available for converting residential space above shops or other commercial property into rental flats. There are a number of qualifying conditions relating to type and size of the building.

First-year allowances (FYA)

The introduction of the annual investment allowance brought the old FYA regime to an end with effect from April 2008. However, Finance Act 2009 introduced a temporary FYA of 40% for expenditure on qualifying plant and machinery between 1 April 2009 and 31 March 2010 for companies and between 6 April 2009 and 5 April 2010 for unincorporated entities.

Unlike the previous FYA regime, the temporary FYA are available to businesses of all sizes and not just small and medium-sized entities.

Annual investment allowance (AIA)

Annual investment allowance (AIA) was originally introduced in Finance Act 2008. It entitles small and medium-sized entities to claim 100% relief on capital expenditure up to certain monetary limits.

This useful relief allowed 100% deduction of the first £50,000 of qualifying expenditure on plant and machinery. It was then increased to £100,000 from April 2010 but as of April 2012 will be reduced to £25,000. If the basis period straddles 1 April for companies, or 6 April for unincorporated entities, AIA must be time-apportioned accordingly. Where a chargeable period straddles 1 or 6 April as appropriate (the 'relevant date'), the maximum AIA is time-apportioned by considering how much of the chargeable period falls before the relevant date and how much after.

However, for expenditure actually incurred before the relevant date, the maximum is calculated as if the increase in AIA had not taken place. For example, in most cases (ignoring short accounting periods), for accounting periods straddling the 2011 relevant date, the maximum AIA for expenditure incurred before the relevant date will be restricted to £100,000.

AIA allocation example

Acme Manufacturing has a year-end of 31 December and during the period ended 31 December 2010 incurred the following capital expenditure:

1 March 2010, new truck: £30,000
1 November 2010, new lathe: £15,000

As the accounting period straddles 1 April 2010 and the AIA thresholds are different for the two periods, the AIA threshold for each component period must be established, as follows:

1 January to 31 March 2010:
£50,000 x 3/12 = £12,500
1 April to 31 December 2010:
£100,000 x 9/12 = £75,000

The total permissible maximum AIA for the accounting period ended 31 December 2010 will therefore be £87,500; the maximum amount qualifying for AIA in the period to 31 March 2010 is £50,000.

Consequently, in this example, the full amount of both purchases (£45,000) qualifies for AIA.

Any expenditure above the maximum AIA amount may be added to general pool and normal WDA claimed.

An important point to note is that AIA may be allocated in the most beneficial way.

Integral features

In line with other special rate allowances from April 2012, integral features will reduce from 10% to 8%. Integral features include (but are by no means limited to):

  •  electrical and lighting systems
  • cold water systems
  • space or water heating systems, powered systems of ventilation, air cooling or air purification (including floors or ceilings that comprise such a system)
  • lift, escalators and moving walkways
  • external solar shading.

Permanent features such as floors, walls and ceilings are excluded.

Plant and machinery - general pool

The proposed changes to capital allowances on plant and machinery from April 2012 are to reduce the allowance from 20% to 18%.The 20% was already a reduction from 25%, so it is obvious the direction it has taken.

The changes apply from 1 April 2012 for corporation tax and 6 April 2012 for income tax. Where a chargeable period spans these dates, a hybrid rate will be used.

Hybrid rate calculation example
A company's chargeable period is the year to 31 December 2012. About one-quarter falls before 1 April 2012 and three-quarters after that date. The expected hybrid rate would be:

91/366 x 20% = 4.97%
275/366 x 18% = 13.52%
Hybrid rate = 18.49%

The expected special rate would be:

91/366 x 10% = 2.49%
275/366 x 8% = 6.01%
Hybrid rate = 8.5%

Business cars

Capital allowances have been used to promote the government’s strategy of encouraging the use of more environmentally friendly cars.

Prior to 1 April 2009 (6 April 2009 for unincorporated entities) cars either went into the general pool if they cost less than £12,000 or into a separate pool if they cost more than £12,000 or had a private use element.

The annual allowance on cars costing over £12,000 was restricted to £3,000. Since April 2009 the rules were changed by Finance Act 2009 for cars purchased from 1 April 2009 (6 April 2009 for unincorporated entities).

From that date, the capital allowances rates are dependent on the carbon dioxide emissions of the cars. A car will either be eligible for 100% first-year allowance or will go either into the general or reduced rate plant and machinery pools, as follows:

  • 100% allowance for cars with carbon dioxide emissions of 110g/km or less
  • General pool allowance for cars with carbon dioxide emissions of between 111g/km and 160g/km
  • Special rate pool for cars with carbon dioxide emissions of 161g/km or more.

The general pool rate is currently 20% and will reduce to 18% from April 2012. The special rate pool currently stands at 10% and will reduce to 8% from April 2012.
The previous £3,000 restriction will continue to apply to expensive cars acquired before 1 April 2008 (6 April 2008 for unincorporated entities) during the transitional period.

Zero-emission goods vehicles - 100% first-year allowances

An allowance was introduced from April 2010 for business expenditure on new zero-emission goods vehicles. It does not apply to expenditure on second-hand vehicles and will last for five years. It is effective from 1 April 2010 for businesses chargeable to corporation tax, and from 6 April 2010 for those chargeable to income tax.

The zero-emission allowance is 100% of expenditure, subject to the following conditions:

  • The vehicle may not under any circumstances produce carbon dioxide emissions when driven
  • It must be of a design primarily suited to conveying goods or burden
  • Expenditure must be incurred on or after 1 April 2010 and before 1 April 2015 for corporation tax, and 6 April 2010 and 5 April 2015 for income tax
  • It does not apply to assets for leasing
  • It does not amount to illegal state aid.
    The amount of expenditure must not exceed €85m per undertaking (which includes a group) over the five-year period of the scheme.

Short-life assets

A business that incurs expenditure on plant or machinery can elect to have it treated as a short-life asset (SLA). Businesses will need to adjust business and investment plans accordingly.

A business that incurs expenditure on an item of plant or machinery can with certain exceptions elect for it to have SLA treatment.
Such expenditure is not included in the main pool, but allocated instead to a single asset pool. The result is that a balancing adjustment can arise where the short-life asset is disposed of within a four-year cut-off period.

Writing down-allowances are given for the single-asset pool on a reducing balance basis at the same rate as those for the main pool (currently 20% per year).

SLA treatment cannot apply to certain assets such as cars, ships, integral features and long-life assets. These are listed in section 84 of the Capital Allowances Act 2001.

As the rules currently stand, if the asset is not disposed of within the four-year cut-off period, the remaining expenditure in the single-asset pool is transferred to the main pool, where writing-down allowances will continue in the normal way.
continue in the normal way.

The cut-off period is four years from the end of the chargeable period in which the expenditure is incurred.

The election for SLA treatment must be made either for corporation tax (within two years of the end of the relevant chargeable period in which the expenditure is incurred) or for income tax (by the anniversary of 31 January after the tax year in which the end of the relevant chargeable period occurs).

The measure announced in Budget 2011 increases the SLA cut-off period from four years to eight. This will have an effect for expenditure incurred:

  • on or after 1 April 2011 for businesses within the charge to corporation tax
  • on or after 6 April 2011 for businesses within the charge to income tax.

The exceptions to items of expenditure that qualify for SLA treatment will continue to apply.

The change is likely to be of most benefit to businesses that make substantial investments in plant or machinery in excess of the annual investment allowance, with a useful life of between four and nine years. The maximum AIA is due to reduce from £100,000 to £25,000 with effect from April 2012.

In conclusion, capital allowances have changed in a major way. What has not changed, unfortunately, is the complexity of the regime.

Barinder Chadha, technical adviser, ACCA