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| Proposed changes to Capital Allowances13 December 2007 |
Introduction
In his March 2007 Budget, the Chancellor of the Exchequer announced major changes to the capital allowances regime. The precise detail of these proposed changes were published by HM Revenue and Customs in July 2007 in the publication “Business tax reform: capital allowances changes”. The proposed changes are currently the subject of a consultation exercise.
These proposed changes will affect the amount of capital allowances businesses can claim on plant and machinery they acquire.
Scope of this briefing
This briefing considers the capital allowances that can be claimed on passenger lift installations.
Currently, a business may claim capital allowances on any lift installation (including the wiring and any alterations to an existing building necessary to operate it).
Expenditure on the installation of a new lift shaft in an existing building will qualify for capital allowances on the basis that it is incidental to the installation of the qualifying plant and machinery, i.e. the lift. Such expenditure in a new building will not qualify for capital allowances.
Explanations
Before considering the impact of the recent Budget announcements, it is important to understand, firstly, capital allowances and, secondly, the definition of a small and a medium sized business.
What are capital allowances?
When a business buys an asset, such as a lift, that will give many years of service, the tax rules aim to spread the tax relief on that asset over a number of years rather than allow it as a deduction from the business’ profits of the year in which it is bought.
This is achieved through the capital allowances regime which, subject to its detailed rules, spreads the tax relief over a period of time.
There are two kinds of capital allowances:
1. First Year Allowance (FYA): In the year that the lift is acquired, a FYA is given on the total cost of the lift. FYA’s are only available to small and medium-sized businesses (please see below).
2. Writing Down Allowance (WDA): In the years following the acquisition of the lift, an annual WDA is given on its remaining value after deducting allowances given to date.
The total capital allowances for each year are then deducted from your business’ profits (as adjusted for tax purposes) to arrive at the profits upon which you will pay tax.
For example, a small business with annual trading profits of £100,000, spending £50,000 on a new lift installation, will have tax on profits as follows:
Current Capital Allowances Regime
Capital Allowances on £50,000 Lift Taxable profits if £50,000 lift purchased
£ £
Year 1 Profit in year 1 100,000
Cost 50,000
FYA - 50% (25,000) Less FYA (25,000)
________ ________
Tax value carried forward 25,000 Taxable profit 50,000
________
Year 2 Profit in year 2 100,000
WDA -25% (6,250) Less WDA (6,250)
________ ________
Tax value carried forward 18,750 Taxable profit 93,750
________
Year 3 Profit in year 3 100,000
WDA -25% (4,688) Less WDA (4,688)
________ ________
Tax value carried forward 14,062 Taxable profit 95,312
________ ________
What are small and medium-sized businesses?
For a business to benefit from the more favourable First Year Allowance, two out of the following three criteria in the Table below must be met:
Business Turnover Assets Employees
Small £5,600,000 £2,800,000 50 or less
Medium £22,800,000 £11,400,000 250 or less
If, for example, two Companies are associated with one another, the relevant limits are halved.
Current capital allowances rules up to 5 April 2008
The available FYA is:
• 50% for small businesses;
• 40% for medium-sized businesses.
The Writing Down Allowance is 25% for all businesses.
Changes to the rules which come into effect on 6 April 2008
Under the new rules:
• There will be a FYA of 100% for the first £50,000 of expenditure in a year;
• The WDA will reduce from 25% per annum to 20% per annum.
For small or medium-sized businesses with annual expenditure on plant and machinery of less than £50,000 per annum, these changes would appear to be beneficial.
But, a further change affecting “fixtures integral to a building” may have an undesirable effect for those purchasing a lift after 5 April 2008.
Fixtures integral to a building
An unexpected announcement in the March 2007 Budget was, with effect from 6 April 2008, the setting of a new rate of WDA at 10% on “certain fixtures integral to a building”.
Whilst the detailed design and scope of the integral fixtures provisions will be the subject of consultation, it seems likely that the ability to claim capital allowances on lift installations may be reduced. It is possible that the integral fixtures provisions are HM Revenue & Customs’ response to a number of specialist firms of capital allowances advisers who, in recent years, have been undertaking reviews of the amounts businesses have spent on their premises with a view to claiming further capital allowances in return for a proportion of the additional tax relief secured.
If the detailed design and scope of the integral fixtures provisions classify lifts as integral to a building, then it could mean that those purchasing a lift after 5 April 2008:
• Will only receive a WDA of 10% (and no FYA of up to 50%); and
• As a consequence, will pay more tax in the year the lift is installed and following few years!
Impact of Proposed Capital Allowances Regime
Capital Allowances on £50,000 Lift Taxable profits if £50,000 lift purchased
£ £
Year 1 Profit in year 1 100,000
Cost 50,000
WDA - 10% (5,000) Less FYA (5,000)
________ ________
Tax value carried forward 45,000 Taxable profit 95,000
________
Year 2 Profit in year 2 100,000
WDA -10% (4,500) Less WDA (4,500)
________ ________
Tax value carried forward 40,500 Taxable profit 95,500
________
Year 3 Profit in year 3 100,000
WDA -10% (4,050) Less WDA (4,050)
________ ________
Tax value carried forward 36,450 Taxable profit 95,950
________ ________
If you are thinking of buying a lift, what should you do?
The choices before you are to buy now or to wait:
• Buy now: If you buy before 5 April 2008 (and are a small or medium-sized business) you will get a FYA (of 50% or 40%).
So if you spend £50,000, you will be able to offset either £25,000 or £20,000 against your taxable profits for this year.
In the following year, we believe that you will be able to claim 20% (the new rate from 6 April 2008) of the remaining expenditure as a WDA (on the basis that the asset was purchased before the changes announced by the Chancellor of the Exchequer came into effect).
• Wait: If you wait until after 5 April 2008, the available tax relief is uncertain and depends upon how lift installations are treated under the integral fixtures provisions.
Upside
If lift installations are not covered by the provisions, you could obtain 100% allowances if you spend £50,000 or less.
Downside
If lift installations are covered by the new provisions, the allowances you are entitled to may be restricted to 10% of the expenditure.
Until the detailed design and scope of the integral fixtures provisions is known (as of today’s date it is not) there is uncertainty, although you may conclude that it is better to obtain a FYA now, as it is likely that lift installations will be treated as integral to a building and, in future, qualify for a reduced rate of capital allowances.
Please note that Britton Price Limited is not your tax adviser and does not have knowledge of your particular tax circumstances. These Notes should only be used for guidance and you should not act upon them, or refrain from acting upon them, without seeking the advice of your own tax adviser. Britton Price Limited cannot be held responsible, nor will it accept any liability, for any action or inaction taken on your part as a result of these Notes.
A PDF version of this document is available by email from: sales@brittonprice.co.uk
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