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Budget 2007 podcast

Tax Rates & Allowances

Capital Allowances

The Chancellor made a number of surprising announcements in the Budget today which will affect most taxpayers.

Reform of the capital allowances regime

The Chancellor today announced significant changes to the capital allowances regime including:

Phased withdrawal of industrial buildings allowances, hotel buildings allowances and agricultural buildings allowances over the next four years. The indication is that writing down allowances will be scaled back to 3% from April 2008, 2% from April 2009, 1% from April 2010 and 0% from April 2011. It is unclear how this will impact the availability of writing down allowances in respect of assets previously acquired during their tax life. To pave the way for abolition, balancing adjustments and the recalculation of writing down allowances in respect of balancing events occurring on or after 21 March 2007 are withdrawn, other than in certain limited circumstances;

Reduction in the rate of allowances for fixtures integral to a building from 25% to 10% from April 2008, subject to a consultation process;

Reduction in the rate of allowances for plant and machinery from 25% to 20% from April 2008, and;

Increase in rate of allowances for long life assets from 6% to 10% from April 2008.

In addition to the above changes, the introduction of a new Annual Investment Allowance for investment in plant and machinery up to £50,000 from April 2008 was announced along with the extension, for a further 12 months, of the temporary 50% rate of FYA for small enterprises. North Sea oil and gas ring fence activities will also retain their existing capital allowances treatment.

Our view
The rationale for the above reforms is to remove outdated and unjustified distortions in the tax system, but they will penalise property owners and occupiers that have based investment decisions on the availability of these allowances. The hardest hit businesses are likely to be those in the hotel, manufacturing, infrastructure and transportation sectors where heavy reliance has been placed on the availability of industrial building and hotel allowances as well as gaining relief from attractive rates of tax depreciation on plant and machinery assets. The measures are also likely to focus such businesses on identifying plant and machinery assets that might otherwise have been ignored in favour of claiming industrial buildings allowances, for example, as well as looking more closely at differentiating between “building fixtures” and chattels or other fixtures.

Empty properties and land remediation

The Chancellor today announced an incentive to encourage property investors to bring empty commercial property back into use. A 100% capital allowance (Business Premises Renovation Allowance) will be offered to companies or individuals that incur spend on or after 11 April 2007 in renovating business premises that have been empty for a year or more, and which are located in certain disadvantaged areas. The announcements enhance the current relief available and extend the application of the relief to include offices and shops.

A consultation has also been announced with a view to considering whether Land Remediation Relief should be extended to include long term derelict land, land contaminated by Japanese Knotweed and remediation undertaken specifically in relation to planning permissions.

”Expensive” cars

The Chancellor today announced the proposed removal of the expensive car rules and their replacement with a system based on cars’ CO₂ emissions; up to 165g/km to be treated in the same manner as other plant and machinery in the general pool and an adjusted rate of writing down allowance for cars with CO₂ emissions over 165g/km. The lease rental restriction formula was also proposed to be replaced with a uniform fixed percentage rate of disallowance.

Our view
This measure is not unexpected and represents both a simplification of the outdated previous rules as well as a drive towards a greener system of relief.

Protecting the environment

The Chancellor today announced a series of proposed changes to the existing enhanced capital allowances regime, including:

Introduction of a payable tax credit for losses resulting from capital expenditure on energy saving technologies, water efficient technologies and the cleanest biofuel plant to ensure both profit and loss making firms have an incentive to invest;

Introduction, subject to State Aid clearance, of a 100% first year allowance for biofuel plants that meet certain qualifying criteria and which make good carbon balance inherent in their design;

Review of classes of equipment that can qualify for enhanced capital allowances for good quality Combined Heat and Power to ensure that the scheme includes all necessary equipment for Combined Heat and Power facilities to use solid refuse fuel, and;

Addition, from 2007, of vehicle wash water reclaim units, efficient industrial cleaning equipment and water management equipment for mechanical seals to the water technology list.

Our view
We welcome these changes as part of the Government’s package of incentives designed to encourage environmentally sound behaviour.



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