Capital allowances update

There are some quite major changes coming up for capital allowances. The changes take effect from 1 April 2012 for companies and from 6 April 2012 for unincorporated traders. The changes are as follows:

  1. Annual Investment Allowance is being reduced from £100,000 to £25,000. This will come as a disappointment to many smaller businesses;
  2. The writing down allowance on the main rate pool will be reduced from 20% to 18%;
  3. The writing down allowance for the special rate pool will be reduced from 10% to 8%.

As with the previous capital allowances rate changes, a hybrid rate will apply to businesses and companies whose chargeable periods overlap April 2012.

Businesses should consider accelerating their capital expenditure to take advantage of the £100,000 AIA before it is reduced.

Example: The general plant pool transitional rules:

The hybrid main rate of WDA for a company’s chargeable period which starts on 1st January 2012 and ends on 31st December 2012 will be:

91/366 x 20% 4.97%
275/366 x 18% 13.52%


The hybrid rate for the lower, 2nd pool of WDA for the same period will be:


91/366 x 10% 2.49%
275/366 x 8% 6.01%

Annual Investment Allowance (AIA)

The maximum amount of annual investment allowance (AIA) will be lowered from £100,000 to £25,000 from 1st April 2012 (for companies) and 6th April 2012 (for individuals). Where a chargeable period spans the operative date of the reduction, the maximum allowance for that period comprises two parts:

  • The AIA entitlement based on the previous £100,000 annual sum for the portion of a year falling before the relevant date; and
  • The AIA entitlement based on the new £25,000 sum for the portion of a year falling on or after the relevant date.



The maximum AIA for a company with a 12 month accounting period from 1 January 2012 to 31 December 2012 will be:

3/12 x £100,000 25,000
9/12 x £25,000 18,750

The way that the legislation is worded means that where there has been a change in the AIA threshold during an accounting period. It is necessary to consider the two period before and after the change, distinctly.

With regard to the part of the period falling on or after 1st April 2012 no more than £18,750 of the company’s actual expenditure in that part period would be covered by its transitional AIA entitlement.

For example:

Kismet Ltd acquires a new item of plant during the year ended 31 December 2012 costing £40,000. What would be Kismet’s entitlement to AIA be in respect of the plant if it was bought on:

a. 1 February 2012, and
b. 1 December 2012

a. As the item of plant was bought before the change in the AIA threshold, the maximum AIA limit would be the amount for the full year, i.e. £43,750.The full £40,000 spent on the item of plant would be eligible for the AIA

b. As the item of plant was bought after the change in the AIA threshold, the maximum AIA limit would restricted to the amount after the change, i.e. £18,750. Therefore, £18,750 of the expenditure would be eligible for the AIA. The remaining £21,250 would attract writing down allowance.


Short Life Assets

A business that incurs expenditure on an item of plant or machinery can – with certain exceptions – elect for it to have short life asset (SLA) treatment.

Such expenditure is not included in the main pool, but instead is allocated 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. If the asset has not been disposed of before the four year anniversary of the end of the accounting period in which the expenditure was incurred, the asset is transferred to the general pool at its tax written down value.

Finance Act 2011 now increases short life asset period from 4 years from the end of the accounting period to 8 years from the end of the accounting period, where the expenditure is incurred on or after 6 April 2011 for unincorpated traders and 1st April 2011 for companies.

Businesses claiming capital allowances should consider a short-life asset election as a matter of routine whenever it acquires a new piece of plant. This will enable the business to realise a balancing allowance on disposal when the asset is sold, rather than waiting for the asset to be written down within the general or reduced rate pools. If the asset is not sold within the 8 year period, the tax written down value will simply be transferred to the general or reduced rate pools.

There is no statutory definition of short a life asset and so HMRC will normally accept a short life asset election, provided that it is reasonable.