Reduction in plant and machinery writing-down allowances and Annual Investment Allowance
The measure
The rate of writing-down allowance for main pool plant and machinery expenditure
is to decrease from 20% per annum to 18% per annum and the rate of writing-down
allowance for special rate pool plant and machinery expenditure is to decrease
from 10% per annum to 8% per annum.
Oil and gas ring fence activities will retain their existing capital allowances
treatment.
The current limit on the Annual Investment Allowance (AIA) will also reduce from
£100,000 to £25,000.
Who will be affected?
All business investing in plant and machinery or with plant and machinery pool balances.
When?
The reduction in rates for plant and machinery writing-down allowances will take
effect from 1 April 2012 for corporation tax purposes and 6 April 2012 for
income tax purposes.
For businesses whose chargeable period spans 1 April 2012 (for corporation tax)
or 6 April 2012 (for income tax) a hybrid rate will have effect for any
unrelieved expenditure, including current year spend, in either pool. The hybrid
rate will be arrived at by calculating the proportion of a chargeable period
falling before the change date and the corresponding period falling after the
change date.
The AIA limit will reduce from April 2012 with transitional arrangements
promised to be published in good time before the reduction takes effect.
The reduction in plant and machinery writing-down allowances from 20% to 18% and
10% to 8% will decrease the associated net present value (NPV) tax relief for
this expenditure by approximately 2.7% and 8.8% respectively.
The benefit of identifying integral features expenditure that also qualifies for
enhanced relief at 100% eg R&D allowances (RDA) or enhanced capital allowances
(ECA) will be an increase in the associated NPV tax relief of 76%.
To the extent possible, businesses may choose to accelerate capital expenditure
projects and focus on maximising the identification of qualifying expenditure to
benefit from both a current higher rate of writing-down allowance as well as
offset against a current higher rate of corporation tax.
For some businesses the reduction in writing-down allowances for plant and
machinery will be offset by the reduction in the main rate of corporation tax
from April 2012. However, some capital intensive companies and REITs may not
benefit to the same extent. The effect on real estate investment trusts (REITs)
will be to potentially increase the level of their distributions as their annual
writing-down allowance shelter reduces, but as non-taxpayers they will not
benefit from the corresponding decreases in the main rate of corporation tax
from 28% over the next 4 years.
For most large businesses the reduction in Annual Investment Allowances will be
of minimal concern.
