The use of Capital allowances can be an easy route for businesses to offset their corporation tax liabilities by reducing their taxable profit.
In a challenging market businesses may be suffering from cash flow issues and greater efficiency in their capital allowance claims can have an immediate impact on the balance sheet. However, it is thought that more than half of businesses continue to under claim.
Businesses are generally able to claim relief at the following proportions in relation to the price of buildings acquired;
- Hotels 20-40%
- Offices 15-30%
- Retail 0-5%
In respect of the relief available for build costs the following percentages are estimated in respect of plant; - Refurbishment 50-70% (10-20% for repairs)
- Fit Out 50-90%
- New Build 5-60%
Given that many businesses do not take advantage of the relief, it is likely that they will also be unaware of the recent changes to the Capital Allowance regime. The changes can be summarised as follows;
There are three main elements to consider in terms of acquisitions of commercial property;
- Land – which does not benefit from allowances
- Buildings – which formerly benefited (if they were not exempt) from an Industrial Buildings Allowance (“IBAs”) at 4% per annum.
- Plant and Machinery comprised within, or affixed to, the building – which formerly attracted a writing down allowance of 25% per annum on a reducing balance basis.
However, the IBA has been abolished (and will be phased out over a period of four years) and the writing down allowance for Plant and Machinery has been reduced to 20% except in relation to integral features (see below) where the rate will be 10%.
A new Annual Investment Allowance (“AIA”) has been introduced to replace the former system of first year allowances for small and medium-sized businesses. The AIA provides all businesses with an annual 100% allowance for the first £50,000 of capital investment in Plant and Machinery (other than cars).
Expenditure by businesses beyond the £50,000 limit will qualify for the standard writing allowances of either 20% or 10% (for integral features).
The AIA applies to individuals, partnerships and companies (including unincorporated associations) provided they are carrying on a qualifying activity, such as a trade (including a property business), profession or vocation.
A point to note however, is that companies that are a member of a group will only receive one AIA per group. Where an individual controls a single company but does not control any related company each related company is entitled to its own AIA. The issue of control is assessed with regard to matters such as similar activities and shared premises.
Where a business makes capital investment that does not fall into the Plant and Machinery category it may be that the investment will be deemed an integral feature. This broadly replaces the former long life asset allowance.
The concept of integral features is that there should be a 10% writing down allowance for certain features which are considered to be integral to a building and have a longer economic life such as;
- Lifts, escalators and moving walkways
- Central heating systems
- Air conditioning systems ; and (possibly)
- Electrical lighting and power systems and hot and cold water systems
Kitchen and toilet facilities are expressly excluded from the list, but these may constitute Plant and Machinery under the 20% category, assessed on a case-by-case basis. The implementation of the integral features scheme has effect for expenditure incurred on or after 1 April 2008 for companies and 6 April 2008 for individuals.
In summary, businesses should now be concerned to not only identify expenditure which may benefit from capital allowances but to clearly distinguish between expenditure on Plant and Machinery and expenditure on integral feature
