Three capital allowances changes that may not be as simple as they seem

In the recent Budget, the Chancellor announced a variety of changes to capital allowances, and there was definitely an element of giving with the one hand but taking with the other. As always with tax changes, though, the devil is in the detail.

1) Annual investment allowances

The headline grabber was the increase in the annual investment allowance (AIA) from £200k to £1million for expenditure incurred in the two years from the start of January 2019. The AIA is in principle available for most types of expenditure on plant and machinery, including integral features and other property fixtures.

Points of practice

It is good to remember that the AIA is all to do with the timing of the tax relief. So increasing the AIA threshold will accelerate relief for some taxpayers but does not increase the overall level of tax saved.

As always when the AIA level is changed, there are some complex transitional rules for periods spanning the dates of change (1 January 2019 and 31 December 2020). It is important to be aware that someone incurring a high level of expenditure, perhaps early in 2019, won’t necessarily be able to claim £1 million of AIAs.

We will explore the transitional rules in more detail in our next blog.

2) Structures and buildings allowance

The introduction of a brand-new structures and buildings allowance (SBA), with immediate effect, was not wholly unexpected. The new allowance offers tax relief for the cost of new constructions (including extensions and refurbishments). The SBA, giving relief at a rate of 2% per annum over 50 years, is entirely separate from (and complementary to) plant and machinery allowances for fixtures in the property.

Points of practice

Apportioning correctly between plant and machinery allowances (potentially giving immediate tax relief for the expenditure on fixtures) and the new structures and buildings allowance will be essential to provide the most favourable overall tax outcome.

The interaction of the SBA with the taxation of capital gains on the property sale will need detailed consideration.

Once more, we will explore the practical implications of this topic in a future blog post.

3) Other changes

The rate of writing-down allowances for special rate expenditure (including integral features) will reduce from 8% to just 6% from April next year. And April 2020 will bring to an end the regime for so-called enhanced capital allowances (ECAs), which are in reality first-year allowances for certain expenditure on energy-saving and water-saving technology.

Points of practice

Property fixtures, including integral features, are usually relieved by the annual investment allowances already referred to above. As such, the reduction in writing-down allowances will mostly affect the largest businesses (especially large groups of companies) where expenditure exceeds the AIA threshold. Those with higher emission cars will also notice the change, however, as the tax relief will lag far behind the true commercial depreciation. Any businesses with significant amounts of expenditure brought forward in their special rate pools will also suffer from the slower rate of relief.

The abolition of ECAs will bring to an end a form of accelerated tax relief that will have been around for nearly 20 years. It has to be admitted that the abolition will represent a considerable simplification of the rules, as the claiming of these specialised first-year allowances has always been relatively complex. Furthermore, most businesses will simply be able to claim AIAs for the expenditure concerned, especially while the threshold is at the higher level of £1 million.

Summary

Overall, the changes offer both some positives and some restrictions. On balance, the enhanced AIA and the introduction of the new SBA should improve tax planning opportunities for most businesses investing in commercial property.

As always with capital allowances, however, there is a danger that the rules will be only partially understood. Failure to get to grips with the transitional AIA rules or with the CGT implications of claiming the new SBA will have potentially expensive implications! Watch this space for further updates and practical advice.