Finance Bill Tracking Service 2010 | Budget 2010

BN09 CAPITAL ALLOWANCES: PLANT AND MACHINERY: INCREASE IN THE AMOUNT OF THE ANNUAL INVESTMENT ALLOWANCE

Who is likely to be affected?

1. Businesses investing more than £50,000 a year in plant or machinery.

General description of the measure

2. Legislation will be introduced in Finance Bill 2010 to double the maximum amount of the annual investment allowance (AIA) from the current limit of £50,000 to a new limit of £100,000.

3. The AIA is currently available to:

•    any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office);

•    any partnership consisting only of individuals; and

•    any company (subject to the limitations indicated below).

4. Anti-avoidance legislation will also be introduced alongside this change to disallow property loss relief against general income to the extent that the loss is attributable to the AIA. This restriction will apply to losses arising as a result of relevant tax avoidance arrangements (see paragraph 16).

Operative dates

5. The increase will have effect for expenditure incurred on or after 1 April 2010, for businesses within the charge to corporation tax (CT), and on or after 6 April 2010, for businesses within the charge to income tax.

6. The anti-avoidance legislation (described below at paragraph 16) will apply to losses arising as a result of certain arrangements entered into on or after 24 March 2010.

Current law and proposed revisions

7. Capital allowances allow businesses to write off the costs of certain 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 main rate of writing-down allowance is 20 per cent per annum for general plant and machinery, and 10 per cent per annum for "special rate" plant and machinery. Both rates operate on a reducing balance basis.

8. Since 1 April 2008 (CT) or 6 April 2008 (income tax) most businesses, regardless of size, have been able to claim the AIA on up to £50,000 of their expenditure each year on plant and machinery (subject to certain exclusions, mentioned at paragraph 15 below).

9. Businesses are able to claim the AIA in respect of their expenditure on both general and "special rate" plant and machinery. The AIA is effectively a 100 per cent allowance that applies to qualifying expenditure up to an annual limit or cap. Where businesses spend more than the annual limit, any additional expenditure is dealt with in the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the 20 per cent or 10 per cent rate respectively.

10. With effect from 1 April 2010 (CT) or 6 April 2010 (income tax) the maximum amount of the AIA will be increased from £50,000 to £100, 000 a year for expenditure incurred on or after that date.

11. Where a business has a chargeable period that spans the operative date of the increase, the maximum allowance for that business's transitional chargeable period is the sum of:

•    the AIA entitlement, based on the previous £50,000 annual cap for the portion of a year falling before the relevant operative date; and

•    the AIA entitlement, based on the new £100,000 cap for the portion of a year falling on or after the relevant operative date.

12. For example, a company with a calendar year chargeable period from 1 January 2010 to 31 December 2010 would calculate its maximum AIA entitlement based on: (a) the proportion of a year from 1 January 2010 to 31 March 2010, that is, 3/12 x £50,000 = £12,500; and (b) the proportion of a year from 1 April 2010 to 31 December 2010, that is 9/12 x £100,000 = £75,000.

The company's maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b) = £12,500 + £75,000 = £87, 500.

13. Furthermore, in the part of the chargeable period falling before 1 April 2010, only a maximum of £50,000 of the company's expenditure would be covered, whereas for the chargeable period as a whole, up to £87,500 of its expenditure would be covered (whether the whole had been incurred on or after 1 April 2010, or part - up to a maximum of £50,000 - had been incurred before that date).

14. The rules about entitlement to an AIA (for example, in relation to companies that fall within the company law definition of a group, or when businesses under common control are regarded as "related" for AIA purposes), are contained in sections 51A to N of the Capital Allowances Act 2001 (CAA).

15. The AIA is available for most expenditure on plant or machinery, but there are certain exceptions, set out in section 38B of CAA, the main exception being expenditure on cars. Furthermore, the AIA is not available where transactions are entered into where the main purpose or one of the main purposes is to enable a person to obtain an AIA to which they would not otherwise have been entitled (section 218A of CAA).

New anti-avoidance rule

16. Anti-avoidance legislation will also be introduced to disallow property loss relief against general income (in terms of Chapter 4 of Part 4 of the Income Tax Act 2007) to the extent that the loss is attributable to the AIA. This restriction will apply to losses arising as a result of relevant tax avoidance arrangements entered into on or after 24 March 2010 and, where this legislation applies, the loss will be treated as attributable to the AIA before anything else, including any other capital allowance. In this context, "relevant tax avoidance arrangements" means arrangements where the main purpose or one of the main purposes is the obtaining of a reduction in tax liability by means of property loss relief against general income, and ones to which the person claiming the relief is a party.

Further advice

17. If you have any questions about this change please email: joy.guthrie@hmrc.gsi.gov.uk or malcolm.smith3@hmrc.gsi.gov.uk or telephone 020 7147 2610. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk