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Plant and Machinery – allowances reduce in April 2012. Time to buy now?

With no further changes announced in the Chancellor’s Autumn Statement, capital allowances on purchases of plant and machinery are set to reduce from April 2012.  So now could be the time to consider bringing forward the purchase of plant and machinery to take advantage of the current capital allowances rates.  

Reductions in capital allowances come into force from April 2012 – i.e., with effect from 1 April 2012 for companies and 6 April 2012 for self-employed individuals.  These affect Annual Investment Allowances and Writing Down Allowances:

1. Reduction in Annual Investment Allowance (AIA)

The AIA provides 100% tax relief on most types of plant and machinery (excluding cars) for all forms of qualifying business.

Since April 2010 the annual AIA limit has been £100,000 but will reduce to £25,000 for expenditure incurred from April 2012.  

For many businesses, the accounting period will straddle the date of change meaning that the old and the new limits have to be apportioned.  Unfortunately, the way in which the rules operate means that there is a proportional restriction to the AIA entitlement for that part of the accounting period falling on or after 1 or 6 April 2012.

Example:
A company’s year end is 30 September.  For the year ended 30 September 2012, the overall AIA entitlement is calculated as £62,500 as follows:

1 October 2011 – 31 March 2012     6/12 x £100,000 = £50,000
1 April 2012 – 30 September 2012   6/12 x £25,000 = £12,500

This means that although a business whose accounts run to 30 September 2012 appears to have an overall AIA of £62,500 as shown in the example above, only £12,500 of expenditure in the period from 1 April 2012 to 30 September 2012 will qualify for AIA.  There is no such restriction in the period 1 October 2011 to 31 March 2012 so the whole of the £62,500 entitlement could instead be spent in that period.

So, if you are considering purchasing plant and machinery it would make sense to do this BEFORE 1 April 2012 in order to maximise your claim for AIA.  

2. Writing Down Allowances (WDA)

The WDA rates will also reduce from 1 April 2012 for companies and from 6 April 2012 for the self-employed.

The annual rates on qualifying plant expenditure not eligible for other allowances such as the AIA will reduce from:

• 20% to 18% on expenditure allocated to the main plant pool, and
• 10% to 8% on expenditure allocated to the special rate pool*.

*The special rate pool includes integral features and cars with CO2 emissions in excess of 160g/km.

The effect of these changes means that the period over which tax relief is obtained is longer than previously.  According to the Government “it is estimated that approximately 2 million businesses could see an increase in their tax liability as a direct result of this measure”.

All this means that taking advantage of opportunities to accelerate capital allowances before they reduce becomes even more pertinent.

To discuss this matter further, please contact the Knill James Tax Team on 01273 480 480.