You may or may not be aware that the Capital Allowances available to all businesses on the purchase of assets (broadly those defined as plant and machinery (P&M)) will change from 1 April 2012 (6 April 2012 for sole traders or partnerships).

Just to set the scene for the past few years Capital Allowances have been kind with the use of the Annual Investment Allowance (AIA) allowing businesses to purchase P&M and get a full deduction of up to £100,000 of expenditure each year. This is now to be reduced to £25,000 from April 2012.

You now either fall into one of two categories. One, a business that would never spend that amount of money on assets (P&M), or two you are thinking of making a big purchase and want to make sure you maximise your tax relief? The following is important to both categories.

So this reduction is bad as basically if you buy P&M and it is not covered by the AIA the amount not covered will only be deducted against profits at the rate of 18% on a reducing balance basis each year. If your accounting year end is not 31 March then you will need to be extra careful (those of you who fall into category One) as the reduced allowance is also pro-rated, as shown in Example 1 below.

Example 1

Key Point 123 Ltd has a year end of 30 April 2012. They buy a new cutting machine on 25 April 2012 costing £10,000. The total AIA available to them for the year is as follows:

1 May 2011 – 31 March 2012 =                           £

(336 days/366) x £100,000                             91,803

1 April 2012 – 30 April 2012 =

(30 days/366) x £25,000                                 2,049

93,852

However only £2,049 of the £10,000 will be deducted against profits in the year to 30 April 2012 as it was purchased in April. The balance of £7,951 will be deducted against profits at 18%* on a reducing balance each year as follows:

- Year End 30.4.12                             £1,431

- Year End 30.4.13                             £1,174

- Year End 30.4.14                             £962

If the machine had been purchased on 31 March 2012 then the full £10,000 would have been deducted against profits in the year ended 30 April 2012.

(*A hybrid rate will apply in this year as the WDA is reduced from 20% to 18% but for ease all is applied at 18% as the figures will not be materially affected).

As you can see from the example, depending on your year end even just a small P&M addition (£2,049 being the worst scenario, with an April year end) you could be caught out by these changes, therefore not receiving an immediate tax deduction for the money you have spent but instead the tax deduction would be spread over many years giving you just 18% of the reducing balance each year.

Hopefully the example shows that the timing of any new additions to P&M must be right. Depending on your circumstances it may be beneficial to advance the purchase (as in example 1) or it could be better to delay the purchase. For instance if the £10,000 machine in example 1 was purchased in May 2012, assuming Key Point 123 Ltd has no other substantial additions then the £10,000 will be covered by the £25,000 available from the start of their new financial year to 30 April 2013.

There are lots of things we can do and an important aspect to consider is the tax definition of the date when the asset is acquired (normally when the obligation to pay for it becomes unconditional), which varies depending on how the asset is acquired (e.g. how it is paid for, such as the payment terms or if it is on Hire Purchase). The only thing that is certain is that we need to talk to you at the planning stage so we can advise you accordingly.

In contrast Short life asset elections are now being extended from 4 years to 8 years on qualifying expenditure from April 2012. This is good news and I suspect these elections will be common place for those accountants who are making sure their clients are being as tax efficient as possible.

Please feel free to contact us should you have any questions or queries on the above. We offer a wide range of services, our experience ranges from specialist corporate and personal tax advice, business start ups to full company and group audits. We also have specialists in a number of markets.

The above article is not designed to be used as advice without further consultation. Therefore we accept no responsibility whatsoever where the above information is used without our further advice.