When a business buys a long term fixed asset it is normal
to depreciate that capital asset over a number of years to
smooth out the effect on net profit. Depreciation being a
management decision is not allowed as a deductible taxable
expense and while being deducted to arrive at the
management net profit is written back in the accounts for
the calculation of tax.
Capital allowances are set by the government at fixed rates
at which a business can claim the expenditure on fixed
assets against the taxable profit. Prior to the financial
year commencing 1 April 2008 capital allowances included a
first year allowance at the rate of 50 per cent of the
original cost for self employed and small limited companies
plus a writing down allowance in subsequent years of 25 per
cent of the reducing balance. The rate of first year
allowance for medium and large limited companies was 40
percent of the original capital cost.
From the 1 April 2008 for small limited companies and from
the 6 April for self employed business the 50 per cent
first year capital allowance is replaced by an annual
investment allowance at the rate of 100 per cent of the
investment subject to maximum expenditure of 50,000 pounds
in the financial year and an amount pro rata to that if for
a small limited company financial year straggles the 1
April 2008.
The writing down allowance is also changed from April 2008
being reduced from 25 per cent of the reduced balance to 20
per cent of the reduced balance.
The annual investment allowance applies to all assets
categorised as plant and machinery which includes most
fixed assets including plant, equipment, fixtures and
fittings, computer equipment and commercial vehicles. As
first year allowances could not be claimed on motor
vehicles not classed as commercial vehicles the annual
investment allowance also do not apply to motor vehicles
which are now subject to a reduced writing down allowance
in the first year of 20 per cent.
A self employed business operating a standard financial
year of 6 April to 5 April 2008 is entitled to the full
50,000 annual investment allowance. If, as is the case of
many small limited companies the financial year straggles
the 1 April 2008 then prior to this date the first year
allowance can be claimed and in respect of expenditure on
fixed assets after the 1 April 2008 the annual investment
allowance can be claimed with the maximum claim limited on
a time based pro rata basis.
Where the financial year for example is 1 January 2008 to
31 December 2008 the capital allowance claim in the first 3
months would be the first year allowance at 50 per cent of
capital expenditure. After the 1 April 2008 the annual
investment allowance of 100 per cent of the capital
expenditure can be claimed subject to a maximum claim of
9/12ths of the 50,000 being 37,500 pounds.
Where capital expenditure exceeds the annual investment
allowance maximum limit the additional expenditure will
added to the existing unwritten down value of the assets
and the reduced writing down allowance of 20 per cent may
be claimed against the net taxable profit.
The annual investment allowance does not replace the 100
per cent first year allowance schemes currently applicable
to various green and environmental schemes and approved
research and development projects. The annual investment
allowance is complimentary to these schemes.
In addition for the financial year starting April 2008
small businesses which have a written down balance for tax
purposes of under 1,000 pounds will be entitled to write
off the total written down value as a capital allowance.
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Terry Cartwright of DIY Accounting, designs simple
Accounting Software that automatically calculate capital
allowances and produce tax returns for self employed and
small limited companies at http://www.diyaccounting.co.uk/
plus Payroll Software for small to medium sized business at
http://www.diyaccounting.co.uk/payroll.htm providing a
complete accounting solution
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