Generally speaking, when a business buys P&M, this will qualify as capital expenditure and as such cannot simply be deducted as an expense in the same way as, for example, wages or rent. Instead, there is a complex system of “capital allowances”, which allows the business to claim relief for the expenditure over a period of time.
The rate at which relief can be claimed depends on the nature of the P&M. Cars have their own special regime which was described in last December’s Tax Insider, and nothing in this article applies to cars. For most other P&M, there are the following allowances:
The Annual Investment Allowance (“AIA”)
The first £50,000 of expenditure on P&M in the year can be claimed in full. In the case of a group of companies or “related” businesses where much the same people own more than one business, the £50,000 is shared out among all the companies or businesses involved, but a single company or sole trader/partnership can claim the full £50,000. There is a nasty technical exception in the case of a partnership where one of the partners is a company, but those involved in such complex structures will probably know all about this.
Expenditure over £50,000 in the year goes into one of two “pools”, depending on what type of P&M is involved:
The 10% Pool
This includes “long life” P&M – this is P&M with an “expected useful life” of more than 25 years when new. Not many types of P&M fall within this definition – the classic example is a printing press. There are various exceptions to this rule as well, and most businesses will not have a problem with it.
The more common forms of P&M in the 10% pool are features “integral” to a building. There is a list of specific types of P&M which fall into this category:
· Electrical systems
· Cold water systems
· Heating and ventilation systems, including air conditioning
· Lifts, escalators and moving walkways
· Solar shading
· Active facades (what these are has been explained to me several times, but I still don’t really understand)
This list is exhaustive – that is to say, if it’s not on the list, it isn’t “integral” plant and doesn’t go into the 10% pool.
Finally, and again with a number of exceptions, assets used for a business of leasing go into the 10% pool.
The 20% Pool
Everything else, being the majority of P&M, goes into the 20% pool. Here we find computers, drills, lawnmowers, milling machines, horses (yes, horses, and there is a tax case to prove it!), tables and chairs, filing cabinets, telephones, and all the other stuff you need to run a business.
Writing Down Allowances
Expenditure in either of the “pools” is written down at the rate applicable to the pool, at 10% or 20%. You take the value of the pool at the start of the year, add in expenditure during the year over and above that which got the AIA of £50,000, and deduct the sale proceeds of any P&M sold in the year. You then claim a deduction of 10% or 20% of the amount against your profits.
For example, suppose Farmer Giles buys a combine harvester for £100,000. The first £50,000 gets allowed in full under the AIA, and the remaining £50,000 goes into the 20% pool, where it is written down at a rate of 20%. Farmer Giles therefore claims a deduction of £50,000 plus 20% of the other £50,000 = £10,000. His total allowances on the combine harvester in the year he buys it are £60,000, and the remaining £40,000 is carried forward to next year, when another 20% (£8,000) can be claimed, and so on.
The Temporary FYA
In the Budget, it was announced that expenditure on P&M which goes into the 20% pool would qualify for an extra “first year allowance” of 40%. This only applies to expenditure incurred during the period from 1 April 2009 to 31 March 2010 (for companies), or during the tax year ending on 5 April 2010 for sole traders and partnerships.
Looking at Farmer Giles again, if he bought his combine harvester during that period, he would get the AIA of £50,000, and on the balance of £50,000 that goes into the pool, another 40% (£20,000). His total allowances for the year are therefore £70,000, an increase of £10,000 on the previous position.
Just how excited Farmer Giles will be about this additional allowance, which in cash terms is worth £4,100 to him if he is a sole trader or partner paying tax at the top rate, and as little as £2,100 if he farms using a company, remains to be seen, bearing in mind that all this is only an acceleration of allowances he would get anyway – next year, the balance of the cost of the combine harvester will be £30,000, on which he will get the 20% allowance of £6,000.
Expenditure “incurred”
One point for Farmer Giles to watch is exactly when expenditure is “incurred” for these purposes. This is not necessarily when he writes the cheque. Expenditure on P&M is “incurred” when the obligation to pay becomes unconditional – typically, when the machine is delivered. Provided the credit period after that is no longer than four months, then the expenditure is “incurred” when the obligation becomes unconditional, even if Farmer Giles does not have to get out his chequebook for another 30 days or so. If the credit period is longer than four months, however, he will “incur” the expenditure when he actually pays.
Ownership
The other little wrinkle that can cause problems is that to claim capital allowances, the P&M must become your property before the end of the period concerned (so, for the new FYA, before 1 April or 6 April 2010, depending on your business structure). Many sales agreements for expensive and complicated kit include a clause saying that title to the goods will not pass until payment has been received in full. Farmer Giles may take delivery of his new combine on 20 March 2010, and pay for it within the credit period of (say) 30 days, but if there is a “title” clause like the one described, he will miss out on his 40% FYA because the combine harvester does not strictly “belong” to him by 5 April 2010, as he has yet to make payment in full.
James Bailey
