Capital allowances get Budget boost
Major changes to capital allowances for expenditure on plant and machinery (P&M), buildings and research and development (R&D) have been announced in the Budget, and will take effect in 2008.
The 100% allowance for the first £50,000 of expenditure on P&M
An important change will be the new annual 100% investment allowance for the first £50,000 of expenditure on P&M which will replace first-year capital allowances. The details and scope are subject to consultation, but according to the Budget report, companies, sole traders and partnerships of any size will be able to claim the new allowance for expenditure on most P&M apart from cars.
If you are planning to buy P&M, you may want to wait until April 2008, provided the delay will not harm your business. The allowance will only accelerate tax relief that you would have received anyway. There is no point delaying purchases to reduce your tax next year if your profits suffer because your business lacks the equipment it needs.
For small businesses the additional benefit of the new allowance will be less because they already qualify for immediate tax relief on half their expenditure on qualifying P&M. The Budget has extended this temporary 50% rate of first-year allowance for another year.
Writing-down allowances
Another big change will be the reduction of the long-standing 25% rate of writing-down allowance to 20%. So if your expenditure on equipment does not qualify for a first-year allowance, it will take ten years, instead of the present eight years, before you get tax relief on nine-tenths of the cost. For businesses that do not spend more than £50,000 a year on equipment, the 20% rate will, in practice, affect only continuing allowances on purchases made before April 2008, and of course cars.
Industrial and agricultural buildings
The other surprise change was that industrial and agricultural buildings allowances will be phased out. The only immediate effect is that allowances will no longer be clawed back if you sell a building on which you have claimed allowances, except for buildings in enterprise zones and contracts entered into before 21 March 2007. If you buy a used industrial building, you will be able to claim the same allowances that the seller would have got if the building had not been sold. The present 4% allowance will fall to 3% from April 2008, and by a further 1% a year until abolition in April 2011.
R&D tax credit
The R&D tax credit provides enhanced tax relief for revenue expenditure on research and development. From April 2008 the rate of relief for large companies will increase from 125% to 130%. For small and medium-sized enterprises the tax credit will go up from 150% to a generous 175%, though this is subject to approval by the European Commission.
Tax is never the only issue. We can advise you on the impact of capital purchases on your cash flow and profits and look at the options for financing investment to grow your business.