Budget Notes

BN07 CAPITAL ALLOWANCES: PLANT AND MACHINERY ALLOWANCES: INTEGRAL FEATURES AND THERMAL INSULATION

Who is likely to be affected?

1. Businesses investing in certain assets.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to provide a new classification of "integral features" of a building, expenditure on which will be allocated to the new special rate pool (BN08) and will attract writing down allowances (WDAs) at 10 per cent a year. This new classification will be effected by means of a short list of the integral features affected. The legislation will also provide that when the whole or the majority of a defined "integral feature" is replaced, that expenditure will also be allocated to the special rate pool. This change is part of the business tax reform package announced at Budget 2007.

3. The new classification will also include two features of a building that have environmentally beneficial qualities, which would not normally qualify for plant and machinery allowances. In addition, allowances for the thermal insulation of existing industrial buildings will be extended to expenditure on the thermal insulation of all existing buildings, used for any qualifying business purpose, other than residential property businesses. However, allowances on all such thermal insulation will, in future, be restricted to the new 10 per cent rate, in place of the 25 per cent rate that currently applies to the thermal insulation of existing industrial buildings.

Operative date

4. These changes will have effect in respect of expenditure incurred on or after 1 April 2008 for businesses within the charge to corporation tax and 6 April 2008 for businesses within the charge to income tax.

Current law and proposed revisions

5. Capital allowances allow business to write off the costs of capital assets, such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax. On and after 1 April 2008 (for corporation tax), or 6 April (for income tax), the rate of WDA will be 20 per cent per annum for general plant and machinery, and 10 per cent per annum for "special rate" plant and machinery (BN08), both on a reducing balance basis.

6. From 1 April 2008 (for corporation tax), or 6 April 2008 (for income tax), expenditure on certain "integral features", as described in a short list, will attract the 10 per cent "special rate" of WDAs. These assets are:

•    electrical systems (including lighting systems);

•    cold water systems;

•    space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems;

•    lifts, escalators, and moving walkways;

•    external solar shading; and

•    active facades.

7. The legislation will also provide that, on and after the operative date (in paragraph 4) the 10 per cent "special rate" of WDAs will have effect for both initial and replacement expenditure on the designated integral features, preventing a revenue deduction in those cases where this might otherwise have been claimed. For this purpose, "replacement expenditure" is defined as expenditure incurred where either the whole, or more than 50 per cent of the integral feature is replaced in a 12-month period. The "more than 50 per cent" test will be determined by reference to the replacement cost of the asset when expenditure is first incurred within the 12-month period in question.

8. Currently, WDAs at 25 per cent a year are available for expenditure on adding thermal insulation to an industrial building. From 1 April 2008 (corporation) tax or 6 April 2008 (income tax) WDAs will be extended to expenditure on the thermal insulation of all existing buildings, used for any qualifying business purpose, other than residential property businesses. However, allowances on all such thermal insulation will, in future, be restricted to the new 10 per cent rate.

9. The detailed design of the new integral features classification was included in a formal consultation launched in July 2007 and draft legislation was published in a technical note in December 2007. The draft legislation relating to replacement expenditure on integral features will be included in Finance Bill 2008.

Further advice

10. If you have any questions about this change, please contact Joy Guthrie on 020 7147 2610 (email: Joy.Guthrie@hmrc.gsi.gov.uk) or Malcolm Smith on 020 7147 2555 (email: Malcolm.Smith3@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk