By Paul Webb

April 2012 will be upon us in no time and brings with it a significant reduction to the current capital allowances legislation. It’s currently possible to write off 100% of the cost of acquiring new business equipment (classified as plant and machinery) as a tax deductable expense in the first year to a value of £100,00.

However, after April next year, the limit of the Annual Investment Allowance (AIA) as it is called, will be dropping from £100,000 to £25,000. The actual dates the changes take effect vary slightly - 1st April for companies and 6th April for sole traders and partnerships.

Apparently, the objective of this change is, according to the Treasury, to “create a competitive corporate tax system and to support enterprise and long-term economic growth”…. which in turn will “refocus the simplification and cash-flow benefits it offers on smaller businesses”. In reality, it’s to finance the cuts to the corporation tax, which in the main are more lucrative for businesses on the main rate. Rationale aside, for business owners mulling over whether to splash out on new IT assets, machinery and the like, it’s worth thinking carefully about the timing of any expenditure and planning ahead to minimise the tax implications.

One subject your tax adviser ought to be raising with you is whether to adjust your accounting dates to be able to take full advantage of the maximum £100,000 - should you require the full tax relief allowance. This is because the wording of the Finance Bill has been adjusted so that whereas previously it was straightforward to span a claim for AIA over two accounting periods, this is no longer possible without incurring a restriction in the amount of tax relief available. For sole traders and partnerships, changing accounting periods is more straightforward to undertake than with a limited company. And for the latter, it is still feasible, albeit a little bureaucratic, but careful tax planning should underpin the final decision made.

Quick recap: what plant and machinery investments are covered by AIA?

No other element of the capital allowances is affected, only plant and machinery covered by AIA. All the usual tools, machinery, vehicles and other equipment you might buy for your business will generally qualify for plant and machinery allowances. Common examples of what’s acceptable include: vans or cars, tools, furniture, computers, machinery and industrial equipment.

In addition, the assets purchased must be wholly used for the purpose of the business, or, if partially used, then a decreased level of AIA may be claimed.

You must also own the asset in question as a result of incurring that expenditure, making leased items non tax deductable. This is rather a shame for small business owners looking to manage cash flow as there are some very good 0% finance opportunities for technology related investments, such as Cisco’s EasyLease programme.

Other restrictions to the use of AIA also apply and it is worth discussing any forthcoming investments with your tax adviser before going ahead.

About the author

Paul Webb is a tax partner at Surrey accountants RJP, contact him via email at pw@rjp.co.uk.