Budget Notes

BN08 CAPITAL ALLOWANCES: PLANT AND MACHINERY: RATE CHANGES & NEW SPECIAL RATE POOL

Who is likely to be affected?

1. Businesses investing in plant and machinery.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to reduce the main rate of writing-down allowances (WDAs) for new and unrelieved expenditure on general plant and machinery (including cars) allocated to a pool from 25 per cent to 20 per cent. This change is part of the business tax reform package announced at Budget 2007.

3. The legislation will also increase the rate of WDA on long-life assets from 6 per cent to 10 per cent. Any unrelieved expenditure in the long-life asset class pool will, for chargeable periods starting on or after the operative date, be allocated to a new, 10 per cent "special rate" pool. Long-life asset pools will cease to exist for all accounting periods starting on or after the operative date.

Operative date

4. The measure has effect for the calculation of WDAs for chargeable periods ending on or after 1 April 2008 for businesses within the charge to corporation tax and on or after 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. The general rate of plant and machinery WDA is currently 25 per cent per annum on a reducing balance basis. For expenditure on long-life assets the rate of plant and machinery WDA is currently 6 per cent per annum on a reducing balance basis.

Main rate of writing-down allowance (WDA)

6. The main rate of WDA will be reduced from 25 per cent to 20 per cent from 1 April 2008 (corporation tax) or 6 April 2008 (income tax). The rate changes have effect from a fixed date, so for those businesses where the chargeable period spans the change date a hybrid rate will have effect for the whole of that transitional chargeable period.

New special rate pool WDA

7. On and after 1 April 2008 (corporation tax) or 6 April 2008 (income tax) a new special rate pool will be introduced. With effect from those dates, expenditure on long-life assets, thermal insulation and integral features (see BN07) will be allocated to the new special rate pool and the rate of WDA applicable to that pool will be 10 per cent per annum on a reducing balance basis.

Long-life asset pool: transitional provisions

8. Where the chargeable period of a business begins on 1 April 2008 (corporation tax) or 6 April 2008 (income tax) any unrelieved expenditure in the long-life asset pool immediately before those dates will be transferred to the new special rate pool and will qualify for 10 per cent WDAs. However, when the chargeable period of a business spans those operative dates, the following transitional provisions will have effect -

•    no new expenditure incurred on or after 1 (or 6) April 2008 is to be allocated to the long-life asset pool - it must be allocated to the special rate pool;

•    a hybrid rate will have effect for existing expenditure in the long-life asset pool for the whole of the that transitional chargeable period and

•    at the start of the next chargeable period, all unrelieved expenditure in the long-life asset pool will be transferred to the new special rate pool.

Hybrid rate

9. For businesses whose chargeable period spans 1 April (corporation tax) or 6 April 2008 (income tax) a hybrid rate will have effect for unrelieved expenditure in any pool, including single asset pools. There will be two hybrid rates:

•    one for any expenditure that qualifies for the current 25 per cent WDA; and

•    the other for any expenditure that qualifies for the current 6 per cent WDA.

10. The hybrid rate is arrived at by calculating the proportion of a chargeable period falling before the change date and the corresponding proportion falling after the change date. For example, if a company's chargeable period began on 1 January 2008 and ends on 31 December 2008, one quarter of that period would fall before the date of the change (on 1 April 2008) and three-quarters would fall after that date. The calculation of the hybrid rate on the main rate of WDAs would therefore be as follows:

91/366 x 25% = 6.22%
Plus 275/366 x 20% = 15.03%
Therefore, hybrid rate for transitional period = 21.25%

Ready reckoner

11. The calculation of the hybrid rate is intended to be straightforward, but to further simplify the calculation, HMRC will provide a ready reckoner to assist businesses in calculating the hybrid rate for any chargeable period affected by the transitional provisions.

Further advice

12. 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