Top 20 accountancy firm, Kingston Smith LLP urges businesses to be aware of the major changes to the Capital Allowances system which will apply next year. As of April 2008, there will be a reduction in the rate of the annual writing down allowances, a phased removal of industrial and agricultural buildings allowances, and the introduction of an annual investment allowance of £50,000 for small and medium sized businesses.

According to Chris Lane, partner at Kingston Smith LLP, “It is important for businesses to be aware of the key changes for next year and to review their tax calculations with their advisors. The major changes to the Capital Allowances system are likely to increase the amount of future tax payable by businesses. However, for those who plan ahead, there may be a window of opportunity before 1st April 2008 to take advantage of the existing rules by accelerating planned expenditure.”

Key changes for 2008 are as follows:

Annual Investment Allowance - For small and medium sized businesses from April 2008 first year allowances will be replaced by an Annual Investment Allowance of £50,000. Expenditure up to this level will receive a full 100% allowance. Any excess will then fall into a general pool and receive either the 20% annual rate or the 10% rate for assets integral to a building. This annual allowance will only apply to plant and machinery and will not include cars. Currently small and medium sized businesses are able to claim 50% first year allowances for unlimited expenditure incurred.

Industrial Buildings - Traditionally up to March 2007 an annual allowance was granted on the cost of the fabric of a building over a 25 year life i.e. 4% per annum. This meant that the owners of an industrial building, including hotels, were able to claim a 4% annual allowance of the cost of the building (excluding the land) against its annual profits. From 20 March 2007 no new IBA claims have been allowed. Furthermore, old existing claims will be scaled back by 1% over the next three years. So for the tax year 2008/09, the annual allowance will reduce to 3% and so on each year until 2010/2011, which will be last year for any IBA claims.

Plant and Machinery - From next year the rate of annual allowance for plant and machinery in the general pool of assets will be reduced from 25% to 20%. There is also a new category of assets that has been defined as those assets that are integral to a building - for example, a lift or air conditioning. These assets will attract a new rate of 10% rather than the existing 25% allowance that is currently available. The only good news is for assets with a life greater than 25 years, from 2008-09 the annual rate of allowance will increase from 6% to 10%.
Lane concludes, “It’s important for businesses to plan ahead in order to be prepared for the effect of the changes. Businesses should work with their advisors to build any expected increased tax liabilities into their cashflow forecasts.  It’s important to plan in advance and to fully understand the impact of these changes on the bottom line.”