Capital allowances and the Budget 2018
In the Autumn 2018 Budget, the Chancellor announced a raft of measures affecting the computation of capital allowances for business. By and large the policies were designed to stimulate business investment in the economy by providing an increased incentive for businesses to invest in capital assets.
The Annual Investment Allowance (AIA)
The AIA is a 100% upfront allowance that applies to qualifying expenditure up to the specified annual limit or cap. Where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief in either the main rate or the special rate pool, where it will attract writing-down allowances at the main rate or special rate respectively.
Since 1 January 2016, the AIA has been set at £200,000 per annum, however the Budget raised the allowance to £1,000,000 from 1 January 2019 for two years.
Where a business has a chargeable accounting period spanning the date of the change, the available AIA must be computed by reference to the number of months of the accounting period falling before and after the date of change, applied to the respective AIA for those periods, and summed.
Once the maximum AIA entitlement for the accounting period is computed, the transitional rules do not allow more than £200,000 AIA to be claimed in respect of expenditure actually incurred before 1 January 2019, as this is the maximum amount that would have been available had there been no change in rate.
How do I compute my available AIA and how is it allocated?
Where a business has a 12-month accounting period ending on 31 March 2019, the first nine months of the accounting period cover a period where the AIA was £200,000 and the last three months of the accounting period cover a period where the AIA was £1,000,000.
The available AIA will be:
(9/12 x 200,000) + (3/12 x 1,000,000) = £150,000 + £250,000 = £400,000
The maximum amount of this available AIA that can be claimed in respect of qualifying expenditure incurred before 1 January is £200,000 (note that it is not £150,000).
The maximum AIA available for expenditure incurred on or after 1 January 2019 is £400,000, rather than £250,000 (subject to the total maximum amount for the whole accounting period of £400,000).
These complex transitional rules could catch out businesses who have accounting periods that straddle the date of the change and do not spend more on capital assets than the £200,000 AIA but will nevertheless have to pay attention to the timing of their expenditure to ensure the fluctuating limit does not produce an unintended consequence.
The end of enhanced capital allowances (ECA) for energy and water efficient plant and machinery
ECA were introduced for purchases of qualifying plant and machinery as listed on the Energy Technology List (ETL) in 2001 and Water Technology List (WTL) in 2003. The lists outline qualifying assets which either use energy efficiently or are environmentally beneficial.
The measure will update the lists of energy efficient and environmentally beneficial technologies and products which are eligible for the first-year allowances known as ECAs. The measure will also end the first-year allowance for products on the ETL and WTL, including the associated first year tax credit, from April 2020 onwards.
The schemes will both end with effect from 1 April 2020 for companies and 6 April 2020 for unincorporated businesses to give businesses time to prepare for the changes.
The new Structures and Buildings Allowance (SBA)
Capital allowances have generally not been available for expenditure on most structures and buildings. This is a new allowance, for expenditure on new non-residential structures and buildings where the contracts for the construction works are entered into on or after 29 October 2018. The relief will be at 2% on a flat rate basis, essentially spreading the cost of construction over 50 years.
Structures and buildings include offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses. Capital expenditure on renovations or conversions of existing commercial structures or buildings will also qualify.
Relief for expenditure on an overseas structure or building will be available on the same basis as for a UK structure or building where the business is within the charge to UK tax.
Relief for the SBA will be available from when the structure or building is brought into use for the first time for a qualifying activity.
The relief is reminiscent of the Industrial Buildings Allowance (IBA) which gave relief on a 4% straight line basis (so write off over 25-year life) on qualifying expenditure and was scrapped back in 2011, however the SBA is wider than the IBA regime.
Capital allowances is a complex area of tax law where it is easy to miss out on available reliefs because professional advice was not sought at an early enough stage. When investing in assets such as real estate, fixtures or plant and machinery we can add significant value by considering your tax position alongside driving your business forward.
For further information, please contact the author, Androulla Soteri or if you would like to speak to a Construction & Real Estate expert, please speak to Brendan Sharkey. Alternatively, send us an online enquiry.