Newsletter - Spring 2012

From 1 April 2011, the Government reduced the rates of corporation tax for all companies. However, in order to ‘pay’ for this reduction, the Government has proposed alterations to the capital allowances system for all businesses, not just companies, to take effect from April 2012.

Changes to the Annual Investment Allowance (AIA)

The first measure will reduce the maximum AIA from its current level of £100,000 to £25,000 for expenditure incurred on or after 6 April 2012 (1 April 2012 for companies).

As the accounting periods of many businesses will span these start dates, a pro rata calculation of their maximum entitlement will be required. Where a business has an accounting period that spans 1 or 6 April 2012, the maximum allowance for that accounting period is the sum of:

However, a restriction is set so that, for expenditure incurred in the part of the accounting period falling on or after 1 or 6 April 2012, the maximum entitlement is given only by reference to the second bullet point above.

This does not affect the overall maximum AIA for the accounting period as a whole but does affect the amount of expenditure after the relevant start date that may be covered by the AIA.

Example

A company makes up its accounts to 30 June annually. For the three months to 30 June 2012, the limit on expenditure qualifying for the AIA is £6,250. For the year to 30 June 2012, the limit is calculated as follows:

July 2011 - March 2012
9/12 x £100,000 = £75,000

April 2012 - June 2012
3/12 x £25,000 = £6,250

Total £81,250

If, in the nine months to 31 March 2012, the company had already spent £40,000 on purchases of machinery, that £40,000 would all qualify for AIA. If, in the three months to 30 June 2012 there were further purchases, £6,250 only would qualify for AIA due to the restriction, even though the overall maximum indicates there is still £41,250 to spend!

However, what is worse is that if the company delays spending the £40,000 until on or after 1 April 2012 in the three months to 30 June 2012, only £6,250 would qualify for AIA.

Timing

The timing of expenditure may therefore be critical. Consideration should be given to ensuring that expenditure is incurred before 1 or 6 April 2012 as appropriate, as this is the date which usually triggers the entitlement to capital allowances.

Traps for the unwary

Two points are worth noting in relation to this trigger point for capital allowances.

Firstly, the normal rule is that capital allowance entitlement occurs when expenditure is incurred and that is the date on which the obligation to pay becomes unconditional. HMRC interpret this as normally being the delivery date.

However, if there is a gap of more than four months between the date on which the obligation to pay becomes unconditional (ie delivery) and the date on which payment is required to be made, the expenditure is not incurred until the later date on which payment is required to be made. This could, for example, affect interest free credit arrangements.

Secondly, a special rule applies to hire purchase agreements. Usually all of the capital expenditure incurred under a hire purchase contract is treated as incurred up front. However, if the asset is not in use at the year end, any capital expenditure not incurred at the year end is deferred until the asset is brought into use, another timing issue.

Upsides

However, where expenditure is deferred in this way, it can mean that two ‘bites’ at the AIA are due, as AIA applies per accounting period. This can require a bit of forward planning to maximise entitlement.

Changes to writing down allowances (WDAs)

For accounting periods commencing on or after, or beginning before and ending on or after, 6 April 2012 (1 April 2012 for companies), the second measure reduces the rates of WDAs per annum on expenditure not relieved by other allowances as follows:

Transitional rules apply for accounting periods which span 6 April 2012 (1 April 2012 for companies). WDAs will be calculated by using a hybrid rate where the accounting period does not coincide with the start dates. So if, for example, a company has an accounting period of 12 months to 31 December 2012, the main pool annual rate calculated on a monthly basis is:

In reality such rates have to be calculated on the more precise daily basis. This change affects all the main rates which apply to plant and machinery, including cars.

What to do

As you can see, the changes are not positive for businesses but, with a bit of careful planning, capital allowances can be maximised. If you would like to discuss these changes in more detail, please feel free to get in touch.