Capital allowances – mostly good news

Annual Investment Allowance doubled

To encourage capital investment by entrepreneurial businesses, the Chancellor announced a doubling of the Annual Investment Allowance ("AIA") for expenditure on plant and machinery from £50,000 to £100,000 per annum from 1 April 2010. Above this threshold, capital expenditure will be eligible for either the standard capital allowances rate of 20 per cent, or the special rate of 10 per cent.

The AIA is available for expenditure on both plant and machinery and integral features which attract the lower rate of 10 per cent.

As a counter measure the temporary 40 per cent first year allowance (FYA) rate, introduced last year, will end on 31 March 2010.  Accordingly, if a company is about to spend more than £250,000, the immediate effect of the removal of the 40 per cent FYA may outweigh the immediate benefit of the increased AIA.

Anti-avoidance measures will also be introduced to prohibit sideways relief for individuals who have crystallised property losses as a result of an AIA claim.

Comment

Whilst the doubling of the AIA should be welcomed, the benefit is only apparent for those companies making modest capital investments. For the larger companies or those with greater capital expenditure, this will have little impact on their overall corporation tax bill.

For the property industry, however, increasing the AIA is more advantageous than the 40 per cent temporary first year allowance as it is applicable to integral features.

Changes to energy and water efficient items

The list of qualifying technologies included in the energy and water efficient schemes is to be amended in the summer of 2010.

The energy efficient scheme will include two new sub-technologies: Permanent Magnet Synchronous Motors and Biomass fired warm air heaters. However, compact heat exchangers and liquid pressure amplification will be removed and the criteria for taps and showers will be tightened.

As a reminder, businesses can be entitled to 100 per cent deductions on capital expenditure qualifying as energy or water efficient.

Minor housekeeping amendments will also be made to both schemes.

Comment

The new sub-categories for energy efficient allowances should allow more scope for making claims but the removal of a technology group (compact heat exchangers) may prove unpopular.

Furthermore, water efficient showers and taps are the more common assets on which 100 per cent capital allowances are claimed, so tightening the criteria may restrict a number of claims.

Zero-emission goods vehicles

Expenditure incurred on zero emission goods vehicles will be eligible for 100 per cent first year allowances.

The vehicle must be new (not second hand) and should, under no circumstances, emit CO2 when driven.

The usual restrictions to first year allowances apply.

Comment

Any extension to the categories of assets qualifying for 100 per cent first year allowances is a welcome measure.