Bringing Forward Spending Plans on Plant & Machinery Could Save Tax
The March 2011 Budget was generally a tax neutral affair. There were some announcements that would be welcomed by the construction industry and others that will be less welcomed by the banks and oil companies. However, like all Budgets, the devil is in the detail and the next step is to try and work out the real tax implications of any changes in order to calculate what steps a business should take and when, in order to maximise on any potential tax benefits.
Forecasts for house building were somewhat brighter with growth of 5.3% this year for investment in private dwellings. The £250m program for first-time buyers will hopefully stimulate a bit of growth at the lower end of the market. The new enterprise zones may also stimulate the commercial property sector and there were a couple of moves to stimulate investment in the private rented sector. £300m has been found to fund additional rail projects and to help tackle potholes. The planned increase in the Aggregates levy will now not go ahead but will increase from £2.00 to £2.10 per tonne from 1st April 2012. The Landfill tax will increase by £8.00 per tonne to £64.00 per tonne from 1st April 2012.
The additional cut in Corporation Tax was unexpected – a 2% reduction from April 2011 instead of the previously planned 1% cut. There will be further 1% reductions in each of the next three years which will see a 23% rate come 2014. In addition, again unexpected, was the change in Capital Allowances for Short Life Assets which will, from April 2011, be extended from 4 years to 8 years. These tax changes and the previously announced changes to the Annual Investment Allowance and Writing Down Allowances have created a window of opportunity to save tax for those contemplating both capital and revenue expenditure. The question is – how? There are three areas to consider.
1. Annual Investment Allowance (AIA) and Writing Down Allowance (WDA)
Major changes to the Annual Investment Allowance (AIA) and the Writing Down Allowance (WDA) are scheduled to add additional tax burdens to plant purchasers. However, in the lead up to the change you need to be aware of what tax allowances are available because managing cash flow and claiming the maximum amount of tax relief, whilst still available, are vital tools for businesses trying to make the most of the recovery. The annual investment allowance (AIA) will reduce from the current £100,000 to £25,000, whilst the annual plant and machinery writing down allowances will reduce from 20% to 18%.
However, this has created a window of opportunity that could save you £’000’s because the changes, announced in the June 2010 Emergency Budget, will not be implemented until 1st April 2012 for an incorporated business or the 6th April 2012 for an unincorporated business.
The AIA is designed to encourage new investment on new or used plant and machinery (not cars) against taxable profits in the year in which the qualifying expenditure was made. The same rules applied to all businesses, large or small, sole traders to Limited companies and even Plant Hirers offering non-operated plant. Until April 2012 the first £100,000 of investment is 100% allowable against tax, with any excess attracting the 20% WDA in the first year and the balance going in to the pool of allowances for subsequent years.
The moral of this story is that if you have plans to replace plant in 2012 – make sure you do it before 1st April for an incorporated business or before the 6th April for an unincorporated business.
2. Capital Allowances for Short Life Assets (SLA)
The increase in the cut-off period from 4 years to 8 years potentially offers another tax saving opportunity. If a business elects for plant to be treated as a short life asset, capital allowances are calculated individually in a single asset pool rather than in the general pool of assets (known as “de-pooling”). The result is that if the asset is sold or scrapped before the end of the 8 year cut-off point, the remaining balance of expenditure in the individual asset pool is compared with the disposal proceeds. A further allowance, or charge, is made for the difference. The decision to “de-pool” has to be made within 2 years of the end of the relevant chargeable period in which the expenditure is incurred.
3. Cuts in Corporation Tax
In an ideal world the unexpected 2% drop in corporation tax would encourage bringing investment and expenditure forward. Unfortunately by the time this is published the best opportunity may already have passed but the principle still holds good with the forecast 1% reductions in subsequent years. Reducing taxable profits by bringing expenditure forward, when the higher rate of 28% is in force, could mean that by not incurring the expenditure when rates have dropped to 26% will result in higher profits because these will be taxed at the lower rate. This could result in a net tax difference in the first year of £2,000 for every additional £100,000 spent. In subsequent years when the tax rates drop by 1% per annum this difference will be £1,000 per £100,000 spent.
Other factors being equal, if your business is contemplating purchasing plant in 2011, there are some strong tax based arguments to bring your purchasing plans forward, before the April deadlines, so that you can maximise on the available tax benefits.
Britcom are not financial advisers. Always seek advice from your financial advisor, be it your accountant or finance director, because every business’ circumstances are different with different tax rates and income and expenditure patterns. Businesses should not make investment decisions purely on a tax basis – there should be a compelling business case for the investment in the first place.