Allowance for “Upglamming”
My earlier plea for members of the broking community to begin 'upglamming' their businesses may already have been heeded by some of their clients. If so, now is a good time to highlight various imminent changes to capital allowances.
Just to recap, those of us intent on ending 2012 in better shape than we started it, should be well away 'upglamming' their activities by examining all aspects of their operations and making changes that help in exuding an air of confidence.
So, as the latest technology comes through the door and you throw out the suits that have seen better days, carry on reading to pick up some tips on capital allowances for plant and machinery that could serve both you and your clients' interests.
If you are a NACFB member, make a note that referrals can be made to capital allowance consultants through our trade body, with commission potentially earned by you.
Two changes to capital allowance rates on plant and machinery are due in April 2012 and will affect all businesses that claim capital allowances as follows:
Changes to the Annual Investment Allowance (AIA):
The AIA provides 100 percent tax relief on most types of plant and machinery, but not cars.
Since April 2010 the maximum annual limit has been £100,000, but will reduce to £25,000 for expenditure incurred on or after 1st April 2012 for companies, and on or after 6th April 2012 for the self-employed business.
An apportionment of the varying limits will therefore be required if the accounting period straddles 1st or 6th April 2012.
That is to say, for expenditure incurred in the part of the accounting period falling on or after 1st or 6th April 2012, the maximum entitlement should be given only to the appropriate share of the £25,000 limit.
On to annual Writing Down Allowances (WDAs), which are available to relieve qualifying plant and machinery expenditure that is not relieved by other capital allowances, such as AIA.
There are currently two rates:
20 percent for plant and machinery generally, including cars, up to and including 160g/km CO2 emissions.
10 percent for the special rate pool which applies to integral features, long life plant, and cars in excess of 160g/km CO2 emissions.
These WDA rates are to reduce from 1st April 2012 for companies and from 6th April 2012 for the self-employed as follows:
18 percent on expenditure allocated to the main plant pool.
8 percent on expenditure allocated to the special rate pool.
Hybrid rates will therefore apply for accounting periods which span 1st or 6th April 2012.
According to the Government, the changes mean around two million businesses could see an increase in their tax liability.
Taking advantage of other opportunities is therefore worthwhile. One way of obtaining more capital allowance is, where possible, using a Short Life Asset (SLA) election.
An asset which qualifies as an SLA can be separately pooled and thereby isolated for tax relief purposes from the main plant pool.
Initially it is eligible for the same allowances (AIA and WDA) as would have applied if placed in the main plant pool.
However, on disposal, where there is unrelieved expenditure after taking disposal proceeds into account, an extra allowance can be claimed for the unrelieved amount.
This equates to writing off the whole of the cost (less disposal proceeds) of the asset over the actual economic life of that asset to the business.
While the SLA facility has been available for years, a second look at what is eligible may be worthwhile in the light of 2012 reductions in AIA and WDA.
In addition, a surprise announcement in the last Budget has improved the scope for using this relief.
Previously, it had only been possible to make an SLA election on assets with an expected useful life to the business of four years or less, from the end of the accounting period of acquisition.
This period has been extended to eight years for additions on or after 1st April 2011 for companies, or 6th April 2011 for the self-employed.
However, an SLA election should only ideally be made on assets which are likely to lose value quicker than they receive tax relief. Where assets hold their value well, this could result in a claw-back of some, or all, of the tax relief given.
Also, some assets are specifically excluded. Key exceptions are cars, integral features and long life assets.
Another issue worth mentioning is 'fixtures and fittings' in second-hand building purchases. The need for accurate allocation of expenditure and identification of eligibility for plant and machinery capital allowance, sometimes means claims are missed.
Due to the fact that there is currently no time limit on when expenditure on plant or machinery (including fixtures) needs to be pooled, such expenditure can be pooled some years after the fixtures are acquired.
This facility to make late claims several years after a property acquisition may mean that capital allowances are given to the current owner (as well as a previous owner), should HMRC not be on its toes.
However, the Government is considering making a requirement that businesses must pool their expenditure on fixtures within a short period after acquisition, in order to qualify for capital allowances.
Furthermore, in order to qualify for capital allowances, the purchaser of a second-hand building may in future have to agree with the seller the amount of the sale price attributable to the fixtures, with both the purchaser and the seller, then required to record and formally notify this to HMRC within a similar timescale.
In respect of expenditure already incurred on such fixtures before any changes in the law come into effect, the Government is considering whether businesses should be required to pool that expenditure within one or two years of the commencement of the mandatory pooling requirement for new expenditure.
If these proposals go ahead, early action may be needed to ensure that all relevant building purchases have been reviewed to secure capital allowance claims.
Well, that about wraps things up on capital allowance changes and apologies if the above comes across as rather dense, or even boring.
Useful stuff though, and NACFB members - don't forget that contact.
Anyone else, feel free to contact the Lead Taker.
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