Writing down allowances
The main rate of writing down allowance reduces from 20% to 18% with effect from 1 April 2012 for limited companies, and from 6 April 2012 for sole traders and partnerships. For accounting periods that straddle these dates, a hybrid rate has to be calculated on a time apportionment basis. Iris will automatically calculate the hybrid rate – as an example, let’s we assume that a company has a chargeable accounting period for the year ending November 2012; in this case the hybrid rate would be calculated as follows:
122/366 days x 20% = 6.67%
244/366 days x 18% = 12.0%
Hybrid Rate = 18.67%
The writing down allowances on the special rate pool also reduces from 10% to 8% from the same dates as above, and again a hybrid rate is used for accounting periods straddling these dates. This lower rate applies to:
- features integral to a building;
- cars with CO2 emissions above 160g/km;
- long life assets where the expected life of the plant and machinery is at least 25 years;
- thermal insulation of buildings.
Using the same November 2012 CAP, the hybrid rate would be as follows:
122/366 days x 10% = 3.33%
244/366 days x 8% = 5.33%
Hybrid rate = 8.66%
Annual Investment Allowances
The Annual Investment Allowance (AIA) enables 100% tax relief to be obtained on most types of plant and machinery, excluding cars but including integral features, and is available for all types of businesses. The AIA has been a maximum of £100,000 since April 2010, but for expenditure incurred on or after 1 April 2012 for limited companies, and 6 April 2012 for sole traders and partnerships, this is set to reduce to only £25,000.
As with writing down allowances, any accounting period that straddles the change will require an apportionment of limits. However, there is a restriction in place on expenditure on or after 1 April 2012 for companies, and 6 April 2012 for sole traders and partnerships. For this period, the maximum entitlement is given only by reference to the appropriate share of the £25,000 limit.
For a company with a year end of 31 December 2012, the total limit of £43,750 will be calculated as follows:
1 January 2012 – 31 March 2012 3/12 x £100,000 = £25,000
1 April 2012 – 31 December 2012 9/12 x £25,000 = £18,750
If this company was planning on spending £40,000 on new equipment in 2012 and this was carried out prior to 31 March 2012 the whole amount would be entitled to AIA as it is within the overall limit of £43,750 for the accounting period. However, if the £40,000 was spent on or after 1 April 2012, only £18,750 would be entitled to AIA due to the restrictions in place. The balance of £21,250 would only be entitled to the written down allowance as stated above.
It is therefore important to plan the timing of any future capital expenditure carefully. To assist with this, the limits for year ends are as follows.
As it can be seen from the above figures, the closer the year end to 31 March 2012 (or to 5 April 2012 for sole traders and partnerships) the lower the amount of expenditure that is entitled to AIA on or after 1 or 6 April 2012.
Short Life Assets
Although changes to the short life assets were brought in from April 2011 it is worth recapping them now as this measure may become increasingly suitable for use in the future with the decrease to the AIA.
With the AIA limit at £100,000 many businesses have found this completely covers any asset additions made and therefore full tax relief is gained in the year of purchase. If an asset is purchased that is expected to have a useful life in the business of less than 8 years, it can be treated separately for capital allowance purposes. This means that instead of any unrelieved expenditure after disposal remaining in the general pool and receiving written down allowances annually, on disposal a balancing allowance can be obtained assuming that the disposal value is less than the tax value on disposal.
If ultimately the asset is kept for more than 8 years, after the 8th year the balance on the individual asset will be transferred in to the main pool and will continue to receive normal written down allowances.
Care should be taken however when electing short life assets, as some assets are specifically excluded from this measure, including cars, integral features and long life assets.