In the 2007 Budget, announcements were made by the government to reform business taxation. The intention was to provide a reduction in administration burdens and promote investment and growth.

Changes to the capital allowances regime for companies were part of the business taxation reform.

The main provisions of the new capital allowances regime are highlighted below.

Annual Investment Allowance (AIA)

A new Annual Investment Allowance of 100% for the first £50,000 of expenditure on plant and machinery in the general pool, long life assets and the new category of 'integral fixtures' was effective from 1 April 2008. This has taken the place of the First Year Allowance (FYA) that was at 50% up until 31st March 2008.

As the new rate applies from 1st April 2008, where a company with a chargeable period straddles the effective date, the amount of AIA will be time-apportioned. Therefore, for a 31st December year end, the AIA available will be £37,500 (9/12 of the standard £50,000). Therefore using 31st December year end, expenditure of plant and machinery for the general pool occurred before 31st March 2008 will still qualify for the 50% FYA.

From 1st April 2008, the writing down allowance (WDA) for plant and machinery in the general pool has been reduced from 25% to 20%.

Further as with the time apportionment of the new allowance of £50,000 above, the new rate will also be time apportioned, so for a 31st December year end the effective rate for the transitional period will be 21.25% (3 months at 25%, 9 months at 20%).

Integral Fixtures

From 1st April 2008, the writing down allowance for 'integral fixtures' have been set at 10%. This lower rate will apply to central heating, air conditioning systems and to lifts, escalators and moving walk ways. Also applying to this new lower rate are items which previously would not have qualified for plant and machinery such as electrical lighting, power systems and hot and cold water systems.

Long-life assets

The writing down allowances on long-life asset expenditure has been increased from 6% to 10% from 1st April 2008.

Enhanced Capital Allowances for Energy Efficient and Water Saving Technologies

The Energy Efficient and Water Saving (Environmentally-beneficial) schemes still allow businesses investing in designated technologies that reduce energy consumption, save water and improve water quality to write off 100% FYA of the cost against the taxable profits of the period in which the expenditure occurred.

Example

Company with accounting year end 30th September 2008

Capital Expenditure during the year:

Plant and Machinery and Integral Fixtures purchased 1/10/07-31/3/08 of £40,000
Plant and Machinery and Integral Fixtures purchased 1/4/08-30/09/08 of £40,000
General pool brought forward £30,000

From the above scenario, all the pre-April 2008 additions for the year ended 30th September 2008 will receive FYAs at 50%. That is, £20,000 FYAs on £40,000.

The additions post-April 2008 for the year ended 30th June 2008 will receive a 100% allowance for 6/12 of the AIA of £50,000. Therefore, of the £40,000 expenditure, only £25,000 will be subject to 100% allowance and the remaining £15,000 will be subject to 22.5% WDA (being 6/12 at 25% and 6/12 at 20%). These allowances will produce a total £28,000 allowance.

The General pool will be subject to an effective rate of 22.5% (being 6/12 at 25% and 6/12 at 20%). Therefore the pool brought forward will receive a writing down allowance of £6,750.

Total allowances of £55,125.