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Capital Allowances Changes For 2012 - Analysis

Capital Allowances Changes For 2012 - Analysis

This article appeared in The Tax Journal ("the non-taxing weekly for top professionals") on Monday, 20 January 2012.


A number of important capital allowances changes will take effect in 2012. Three of the key measures include:



The government announced a number of changes to the capital allowances regime which will take effect this year. The three major changes are summarised below.

1. Reduction in main and special rates of WDAs

For accounting periods ending on or after 31 March 2012 (corporates) or 5 April 2012 (non-corporates) the main pool rate of writing-down allowance (WDA) will fall from 20% to 18% (Finance Act 2011 s 10).


Furthermore, for expenditure incurred on or after 1 April 2012 (corporates) or 6 April 2012 (non-corporates) the reduced ‘special rate’ of WDAs for integral features within buildings, long-life assets, thermal insulation added to existing buildings, and cars with carbon dioxide emissions in excess of 160g/km will fall from 10% to 8%.

Why it matters:

This is a revenue raising measure that will affect all businesses that invest in plant and machinery. Published Conservative party policy from before the last election aspired to cutting rates of corporation tax funded by reductions in capital allowances. So the aim is to reduce ‘headline’ tax rates, by changing the calculation ‘small print’ to increase the taxable profits upon which those rates apply. In effect, businesses that invest in plant and machinery will subsidise the tax rate reduction for taxpayers that do not.

2. AIA reduction

From 1 April 2012 (companies) or 6 April 2012 (non-corporates) the maximum Annual Investment Allowance (AIA) for expenditure on plant and machinery will fall from £100,000 to £25,000.

Why it matters:

Originally, from April 2008, a new AIA gave an annual 100% capital allowance for the first (but not necessarily the earliest) £50,000 of investment in plant and machinery. From April 2010 the maximum AIA was increased to £100,000. The AIA was a compliance simplification and tax relief acceleration measure that acted like a type of de minimis provision.  The government said it would benefit 95% of taxpayers.  The reduced AIA will result in increased tax bills for those businesses (that is, generally smaller owner-managed businesses that invest in plant and machinery). The impact will be particularly severe for larger one-off purchases, such as an expensive piece of production equipment, or a freehold trading or investment premises. This is because the total expenditure on plant may well be less than £100,000 (or perhaps not significantly more) but much greater than £25,000.


Furthermore, in making the calculation in the tax computation there is a trap for the unwary. The AIA is given for the ‘chargeable period’ in which the AIA qualifying expenditure is incurred (CAA 2001 s 51A(2)). For corporates this is the accounting period. For non-corporates it is the period for which accounts are drawn up, or the standard tax year. Taxpayers with a chargeable period which straddles April 2012 must split it into two separate periods (FA 2011 s 11(6)). However, the calculation is not as straightforward as merely working out how much of the relevant period falls before the date when the change occurs and how much after, and then apportioning the old and new AIA limits.


In respect of expenditure actually incurred after the relevant date it is also necessary to restrict the maximum AIA after the change to a time-apportioned limit for that part of the chargeable period (FA 2011 s 11(7)).


Example: Reduction in AIAs

A company with a calendar year accounting period from 1 January to 31 December 2012 must split its period into two. The first period would run from 1 January to 31 March 2012 (ie, three months) when the maximum AIA was £100,000. The second would be from 1 April to 31 December 2012 (ie, nine months) when the maximum AIA was £25,000.


It would calculate its maximum AIA as follows:

Therefore, its maximum AIA for this chargeable period would be £43,647 (ie, £24,863 + £18,874).


However, the restriction in s 11(7) must then be applied to the latter tranche of expenditure. If, say, £40,000 was incurred on plant during the year, with £10,000 incurred before 1 April and £30,000 after, then the actual maximum AIA allowed would be only £28,874, ie: £10,000 for the early expenditure (only the actual expenditure), plus   £18,874 for the later expenditure (limited by s 11(7), as above).


Even though the total expenditure on plant of £40,000 is less than the combined maximum AIA of £43,647 it is not possible to shelter it all via the AIA. It is not possible to claim the full £43,647 AIA because there is insufficient expenditure before 1 April and s 11(7) limits the AIA for the later expenditure.

3. Plant fixtures 

Two significant new technical obstacles will be introduced before a purchaser of second-hand fixtures will be able to claim any capital allowances. The onus will be on the buyer to demonstrate that both requirements are met.


Initially, from April 2012, these new rules will only apply where the seller has claimed capital allowances (that is, the 'pooling requirement' below is disapplied). However, from April 2014 the legislation will apply in full to all transactions.


First, expenditure on plant fixtures will have to be pooled (that is, notified to HMRC in a tax return) by the seller in a chargeable period before the fixtures are sold on or otherwise disposed of. This is called the ‘pooling requirement’.


Second, in almost all cases the seller and buyer must agree a CAA 2001 s 198 or 199 joint election, or within two years of the transaction refer the matter to the First-tier Tax tribunal for determination.

Why it matters:

These changes will affect all commercial property owner-occupiers and investors buying second-hand property. They will place an additional administrative burden on buyers. Furthermore, as HMRC acknowledged in its 31 May 2011 consultation document, many businesses (perhaps especially smaller, unrepresented businesses) might inadvertently miss the requirements and lose out. The matter will need to be best dealt with at the time of the transaction, so in practice will invariably fall under the responsibility of the conveyancing adviser. Unfortunately, not being tax specialists, many may have limited knowledge of direct taxation and are unlikely for some time to even become aware of this change to the detailed tax rules.


However, if the new obstacles are not met then the result will be catastrophic. No capital allowances will ever be available to the buyer or any future owner of the property. This is expected to adversely affect the market value of some properties.


Currently, when a property changes hands the buyer’s capital allowances claim is generally calculated using a ‘just and reasonable’ apportionment of the purchase price (CAA 2001 s 562), although the amount may be restricted by past claims made by former owners (for example, by CAA 2001 s 185). Alternatively, within two years of the transaction the parties have the option of negotiating an appropriate value for the capital allowances and confirming this by a s 198 or 199 joint election.


Nothing in statute currently requires a taxpayer to add expenditure that qualifies for capital allowances to a pool in the period when the expenditure was incurred. Therefore, the flexibility exists to add the expenditure to any later pool. The taxpayer has met all of the long-standing basic requirements to claim capital allowances as intended by Parliament (that is, having incurred capital expenditure for business purposes, on the provision of plant owned by the business) and has in fact lost out by deferring the relief.


However, from April where the seller has claimed capital allowances the purchaser must prove his claim before a Tribunal unless a s 198 election is in place. The time limit for making the election or notifying the matter to the tribunal is two years from the transaction completion date. Given that the seller’s and buyer’s interests are in direct opposition here, irrespective of the underlying position that the allowances should generally transfer by default to the buyer, the natural temptation will be for the seller to press for a low s 198 election in an effort to keep most or all of the capital allowances. It is certainly the case currently that if the issue of s 198 elections arises, voluntary elections can often be a matter of considerable disagreement and one of the last things to be settled during many transactions. It is easy to see this becoming routine. Furthermore, because under the new rules both parties can unilaterally refer the matter to a tribunal this means either can try to ‘bully’ the other to back down or be forced to incur the trouble and expense of going to a Tribunal (the outcome of which will inevitably involve uncertainty). This is likely to discriminate against smaller, poorly resourced and less well advised businesses.


From April 2014, where a seller has not claimed any capital allowances, which is commonplace for smaller businesses, the new rules will result in an absurd situation. Instead of the buyer simply claiming capital allowances by virtue of having met the long-standing basic requirements to claim allowances, the buyer will also need to get the seller’s agreement to pool the expenditure. In effect the seller will have to go through most of the motions of claiming capital allowances (that is, pool the expenditure but not claim any WDAs) and agree to formally pass all the allowances on to the buyer. No doubt this will have to be at the buyer’s additional cost. As discussed above the temptation will be for the seller to press for a low election amount. This is likely to be a recipe for additional cost and disruption.


HMRC has requested comments on the draft legislation by 10 February 2012. 


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Tags for this article: capital allowances, plant, machinery, fixtures, main rate pool, special rate pool, annual investment allowance, AIA, fixed value requirement, pooling requirement, mandatory pooling

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