Recent news On 17 December 2007, HMRC published a further technical note including draft legislation on the planned changes to capital allowances. These changes were first outlined in Budget 2007. The changes will be introduced from 1 April 2008 for companies and from 6 April 2008 for individuals unless otherwise stated. In addition Budget 2008 announced further changes and consultations with Finance Bill 2008 being published on 27 March 2008. An update on all the changes is set out below. Integral Features – Special Rate Pool (10% Writing Down Allowance) Special rate pool at 10% reducing balance basis to include integral features (see list of included assets below), long life assets and thermal insulation. Electrical systems (including lighting systems) Cold water systems Lifts, escalators and moving walkways Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems, External solar shading Active facades (subsequently omitted in Finance Bill 2008 – the exterior wall is not allowable and the interior wall is part of the air conditioning system so attracts 10% rate) The items in bold above were previously regarded by HMRC as predominantly non-qualifying. Therefore the definition of plant and machinery has potentially widened. Toilet and kitchen facilities not included so therefore at 20% rate Budget 2008 announced that where the whole or more than 50% of an integral feature is replaced in a 12 month period, this expenditure will also be treated as a 10% integral feature and a repairs deduction will be denied. Thermal insulation installed in an existing building will attract 10% rate. This was previously only available to industrial buildings, now extended to all properties other than dwellings General plant and machinery capital allowances reduced from 25% to 20% from 2008-09. Industrial Building Allowances & Hotel Allowances (IBA) IBA and Agricultural Buildings Allowances (ABA) phased abolition by 2010-11. The value of the writing down allowances (either 4 per cent of the original expenditure, or the recalculated annual allowance after a sale or acquisition) will be progressively reduced as follows: in 2008-09 or financial year 2008 a business will be entitled to 75 per cent of the WDA; in 2009-10 or financial year 2009 a business will be entitled to 50 per cent of the WDA; and in 2010-11 or financial year 2010 a business will be entitled to 25 per cent of WDA. Most balancing adjustments from 21 March 2007 will be at tax written down value. Therefore there will not be a balancing charge or allowance on disposal between 21 March 2007 and 1 April 2011. Enterprise Zone Allowances to be abolished from 2011 in line with withdrawal of IBA Anti avoidance was introduced effective from 12 March 2008. Certain transfers had taken place between connected companies, creating a balancing allowance and the companies had different chargeable periods. Where the purpose or one of the main purposes was a tax advantage for the buyer, the new legislation would limit the balancing allowance available. Enhanced Capital Allowances (ECA) Payable credit for loss making companies resulting from capital expenditure on certain designated ‘green technologies’ qualifying for ECA incurred on or after 1 April 2008 Credit is 19% of loss surrendered subject to an upper limit of the greater of a) the total amount of the company’s PAYE and NIC liabilities for payment periods ending in the chargeable period and (b) £250,000. For clarity, the £250,000 is the amount of the tax credit that can be claimed rather than the quantum of the loss that can be surrendered. This means that a company can surrender a loss of up to £1,315,789 regardless of the amount of its PAYE and NICs liabilities. Potential claw back of ECA payments where a disposal occurs within a specified period. Additional qualifying products announced to include Waste water recovery and reuse systems; Compressed Air Master Controllers; Compressed Air Flow Controllers; Heat Pump Dehumidifiers; White LED Lighting Other Changes 50% first year allowances for small enterprises extended for a further 12 months to 2008. Annual investment allowance for the first £50,000 on plant and machinery (excluding business cars but including integral fixtures and long life assets) from 2008-09. Plant and machinery pools of less than £1,000 can be written off in full if the claimant chooses. This excludes single asset pools. CAA2001 s29 for fire safety expenditure is repealed effective from April 2008 Business Premises Renovation Allowances of 100% will be available from 11 April 2007 on renovation or conversion expenditure on vacant (at least 1 year) commercial property in assisted areas. The DTI have set up a website to easily identify postcodes in assisted areas http://www.dtistats.net/regional-aa/aa2007.asp Subject to further consultation in Summer 2008, land remediation relief will be extended to long term derelict land (derelict from 31 March 1998) and expenditure on the removal of chemically treated Japanese Knotweed (for expenditure incurred after 1 April 2009). Company cars with emissions higher than 160g / Km will attract the 10% allowances; cars with emissions of 160g / Km or lower will attract a 20% allowance. Fall in onshore corporation tax from 2008-2009 to 28%; Increase in small companies corporation tax to 20% from 2007-8, 21% in 2008-09 and 22% in 2009-10 How this will affect you? With the fall in corporation tax rates and plant and machinery rates from 2008-09 claiming the correct allowances in current periods will lead to greater tax savings. For any expenditure incurred on hotels and industrial properties it is worth considering reallocating expenditure to plant and repairs. The definition of Integral Features includes lighting systems. This means that 100% ECA will be more easily obtainable on lighting but this still depends on the product specification. Existing percentage agreements are likely to be invalid for expenditure incurred after 1 or 5 April 2008. They should be reviewed and adjusted to reflect the changes above. s198 elections will apply to Integral Features. The plant which is covered by the election will need to be reviewed so as to categorise this as either Main Pool or Integral Features additions. Opportunities for identifying additional qualifying expenditure on secondhand additions from April 2008 may exist where a s198 election has previously been agreed. When assets now classed as Integral Features but claimed in the 25% pool by the seller are transferred between group companies an election may be made. The election allows any expenditure on "pre-commencement Integral Features" (i.e. incurred prior to 1 April 2008 and allocated to the seller's main pool) to remain qualifying for 20% writing down allowances in the buyer's main pool. This election is at tax written down value at the date of transfer. Anti avoidance has been introduced for property sales between connected parties. It will not be possible to claim 10% capital allowances on a purchase of integral features that were previously non-qualifying expenditure when originally incurred by the seller. This also applies to chains of sales between connected parties. No grandfathering provisions have been introduced for Integral Features so both the old and new rules will apply to a construction contract that spans April 2008 adding more complexity to compliance. Top of page