Your business and capital allowances

‘Capital allowances’ is the term used to describe the deduction we are able to claim on your behalf for expenditure on business equipment, in lieu of depreciation.

Annual Investment Allowance (AIA): The first £100,000 of the year's investment in plant and machinery, except for cars, is allowed at 100%. This applies to any size of business and most business structures, but there are provisions to prevent multiple claiming. Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as long-life assets or integral features) – see below.
The maximum AIA increased with effect from 1 April 2010 (corporates) or 6 April 2010 (others). If an accounting period straddles the “operative date”, the maximum AIA for the transitional chargeable period is the sum of:

• the AIA entitlement, based on the previous £50,000 annual cap for the portion of a year falling before the relevant operative date; and
• the AIA entitlement, based on the new £100,000 cap for the portion of a year falling on or after the relevant operative date.

Thus a company with a calendar year chargeable period from 1 January 2010 to 31 December 2010 would calculate its maximum AIA entitlement based on:
(a) the proportion of a year from 1 January 2010 to 31 March 2010, that is, 3/12 x £50,000 = £12,500; and
(b) the proportion of a year from 1 April 2010 to 31 December 2010, that is 9/12 x £100,000 = £75,000.
The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b) = £12,500 + £75,000 = £87,500.
Once established, the maximum entitlement can be spent at any point in the 12 month period, with one restriction, that only expenditure up to £50,000 will qualify before 1 April 2010.
Note that the maximum AIA reduces to £25,000 with effect from April 2012.
Special rules which may disallow property loss relief against general income to the extent that the loss is attributable to the AIA are now in force. This provision will only apply where there are relevant tax avoidance arrangements. Contact us for more details.
Enhanced Capital Allowances (ECA): In addition to AIA, a 100% first year allowance is available on energy saving or environmentally beneficial equipment. Where companies (only) have losses arising from ECAs, they may choose how much they wish to carry forward and how much they wish to surrender for a cash payment (tax credit payable at 19%).
There is a separate ECA scheme for electric and low CO2 emission (up to 110 g/km) cars, zero-emissions goods vehicles (the last proposed, for five years from 1 April 2010 (corporates) or 6 April 2010 (others)) and natural gas/hydrogen refueling equipment. They still qualify for the 100% first year allowance, but do not qualify for the payable ECA regime.
Writing Down Allowance (WDA): Any additional expenditure not covered by the AIA (or enhanced capital allowances (ECA)) level enters either the main 20% pool or a special 10% pool, attracting WDA at the appropriate rate. These rates are set to reduce to 18% and 8% with effect from April 2012. The special rate 10% pool applies to long life assets, the addition of thermal insulation to existing commercial buildings, and integral features of buildings, specifically:

• Electrical systems (including lighting systems)
• Cold water systems
• Space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
• Lifts, escalators and moving walkways
• External solar shading
• Active facades (climate-responsive features).

The 20% pool applies to most other plant and equipment, including some cars (see below).
Businesses may claim a WDA of up to £1,000 where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.
Cars: A rate of 20% applies to cars with CO2 emissions exceeding 110 g/km. However, cars with CO2 emissions above 160 g/km will be restricted to 10% WDA. Expenditure incurred before April 2009 on “expensive” cars continues under the old regime (£3,000 per year cap on capital allowances). For non-corporates, cars with a non-business use element continue to be dealt with in single asset pools, so the correct private use adjustments can be made but the rate of WDA will be determined by the car’s CO2 emissions.
Buildings: The phased withdrawal of industrial and agricultural buildings allowances ends during 2010/11 with essentially a further reduction in the WDA by 50%. The restricted allowance is now 1%, subject to transitional rules.
A maximum 100% initial allowance is available for conversion of parts of business premises into flats, business premises renovation allowance and Enterprise Zone Allowance. WDA of 25% (on a straight line basis) applies to expenditure on which an initial allowance is not claimed.