The last few years have seen many changes in the way in which businesses – both incorporated and unincorporated – claim capital allowances on their cars, equipment and industrial buildings and in this article we review the current position.

While for the purposes of its accounts, a business is able to depreciate its capital assets – its plant and machinery, equipment, cars, fixtures and fittings – at whatever rate it considers to be reasonable in the circumstances, that depreciation is not an allowable deduction for tax purposes. Instead, capital allowances are given on the cost of the assets at rates prescribed by legislation...

Plant and machinery

Capital allowances are given for expenditure on “plant and machinery”- which is taken to include all assets kept for permanent employment in the trade. Although in the case of expenditure on equipment, machinery, computers, cars etc, the availability of capital allowances is generally not in doubt, H M Revenue & Customs will deny capital allowances on expenditure which, rather than performing a function in the business operations, provides the place or setting in which these operations are performed.

From 1^st April 2010, the first £100,000 of capital expenditure on qualifying business assets – office equipment, computers, machinery, cars etc – is covered by the Annual Investment Allowance (AIA), so that the cost is allowed in full for tax purposes in the year in which it is incurred. The AIA was increased from £50,000 in the March 2010 Budget.

Many businesses will have an accounting period that spans 1^st April 2010, the date from which the AIA is increased to £100,000. The maximum AIA for such businesses for that particular accounting period is calculated proportionately, with the £50,000 and £100,000 maximum pro-rated on a daily basis.

Expenditure over the AIA amount is added to either the “main pool” or the “special rate pool” and capital allowances (called writing down allowances or WDAs) are calculated on the balance of the expenditure in those pools at 20% and 10% per annum respectively. The special rate pool is used for expenditure on certain types of integral features of a building, on long life assets (those with an expected economic life of 25 years or more) and on high emission cars (see below). Expenditure on all other qualifying assets is included in the main pool.

The amount of WDA is proportionately increased or reduced if the accounting period is longer or shorter than 12 months.

Cars

For cars purchased as from April 2009 (1^st April for companies and 6^th April for businesses subject to income tax), the old distinction between cars costing less than or over £12,000 has disappeared and the new regime is based entirely on the CO2 emissions of the car:

• Cars with CO2 emissions of 110g/km or less: a 100% first year allowance is available – if the full amount is not claimed the balance of the expenditure is included in the main pool of plant and machinery expenditure and capital allowances of 20% per annum are claimed in subsequent periods.

• Cars with CO2 emissions of over 110g/km and up to 160g/km: the cost is included in the main pool of plant and machinery expenditure and capital allowances are given at a rate of 20% per annum

• Cars with CO2 emissions of over 160g/km: the cost is included in the special rate pool on which capital allowances are given at a rate of 10% per annum

In the case of unincorporated businesses (sole traders and partnerships), if there is private use of a car then the cost of each car with private use is treated separately, with the capital allowances (calculated at the above rates) reduced to take account of the proportion of private use.

For cars purchased before April 2009, the old rules continue to apply until 2014 – cars which cost £12,000 or more will continue to be treated separately and their capital allowances restricted to £3,000 per annum, until the first accounting period beginning after 1^st/6^th April 2014 (for companies/unincorporated businesses respectively) when any remaining expenditure will be transferred into the appropriate pool by reference to the car’s CO2 emissions (cars with private use belonging to unincorporated businesses will continue to be treated separately so that allowances can be restricted for the private usage).

Industrial Buildings

Industrial Buildings Allowances (IBAs) are being phased out and will shortly disappear altogether. IBAs were given at a rate of 4% per annum on the allowable original cost; however the rate has been gradually reduced since April 2008 and the current rate (from 1^st April 2010) is just 1%. No IBAs will be given as from 1^st April 2011.

Krystyna Knight, of Silver Levene provided research for this article.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk