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| CHANGES BY HM REVENUE & CUSTOMS TO THE CAPITAL ALLOWANCES THAT CAN BE CLAIMED ON LIFT INSTALLATIONS21 April 2008 |
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 were then the subject of a consultation exercise.
These proposed changes would affect the amount of capital allowances businesses can claim on plant and machinery they acquire. On budget day this year the Chancellor confirmed that these proposed changes would become law.
Scope of this briefing
This briefing considers the capital allowances that can be claimed on passenger lift installations.
Up until the 31st March 2008, a business has been able to 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 did qualify for capital allowances on the basis that it was 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.
Up until 31st March 2008 there were two kinds of capital allowances:
1. First Year Allowance (FYA): In the year that the lift was 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 whose yearend was the 31st March 2007 with annual trading profits of £100,000, spending £50,000 on a new lift installation, will have tax on profits as follows:
Capital Allowances Regime to 31st March 2008
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 came into effect on 1st 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.
• A new Special Rate Pool has been created for “fixtures integral to a building” that will only receive a 10% WDA per annum
So 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. However, the Special Rate Pool for “fixtures integral to a building” will have an undesirable effect for those purchasing a lift after 1st April 2008.
Fixtures integral to a building
An unexpected announcement in the March 2007 Budget was, with effect from 1st April 2008, the setting of a new rate of WDA at 10% on “certain fixtures integral to a building”.
The detailed design and scope of the integral fixtures provisions were subject to consultation, and the outcome of this is that the ability to claim capital allowances on lift installations has been reduced. It is possible that the integral fixtures provisions were 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.
As the detailed design and scope of the integral fixtures provisions now classify lifts as integral to a building, it means that those purchasing a lift after 1st 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 New 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 WDA (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
________ ________
Further definitions
The “special rate” of 10% will apply to both the initial purchase of the passenger lift and to any replacement expenditure during the lifetime of the lift. “Replacement expenditure” is defined as occurring when more than 50% of the lift is replaced during a 12-month period. In order to assess if more than 50% has been replaced the replacement cost of the lift will need to be known when this replacement expenditure first occurs.
This would appear to mean that if you are planning to have a major lift refurbishment, say replacing the lift drive mechanism and having the lift car refurbished, you will need to also ask for an estimate as to what a new lift would cost compared to the proposed refurbishment.
Summary of differences between Old and New Rules
Taxable profits under
Old Rules Taxable profits under
New Rules
£ £
Year 1 50,000 95,000
Year 2 93,750 95,500
Year 3 95,312 95,950
________ ________
Total taxable profits 239,062 286,450
________ ________
Conclusion
The new Capital Allowance rules are less beneficial than the old rules when purchasing a new lift or having a major refurbishment undertaken. It may therefore make more sense to consider a longer term replacement plan where one third of the lift is upgraded over a three year cycle. This would be more tax efficient and help your cash flow.
However if your business has an old passenger lift that keeps breaking down then a replacement lift may be the only solution. At the end of the day the needs of your business will always take
precedence over any possible tax savings.
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.
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