Capital allowance changes

In order to pay for the reduction in corporation tax rates, two key areas of change to capital allowance rates are to take effect from April 2012.
The first measure is a general change to the rate of writing down allowances. The second will reduce the maximum AIA to £25,000 for expenditure incurred on or after 6 April 2012 (1 April 2012 for companies).

As the accounting periods of many businesses will span the operative date of change, a pro rata calculation of their maximum entitlement will be required.

Where a business has a chargeable period that spans the 1 or 6 April 2012, the maximum allowance for that chargeable period is the sum of:

  • the maximum AIA entitlement based on the previous £100,000 annual cap for the portion of a year falling before the 1 or 6 April; and
  • the maximum AIA entitlement based on the new £25,000 cap for the portion of a year falling on or after the 1 or 6 April.

However, a restriction is set so that that, for expenditure incurred in the part of the chargeable period falling on or after 1 or 6 April 2012, the maximum entitlement is given only by reference the second bullet point above. This does not affect the business’s maximum AIA for the chargeable period as a whole but the amount of expenditure after the relevant start date that may be covered.

Example 1

For a company with a calendar year accounting period the maximum AIA for the year ended 31 December 2012 will be £43,750, being 3/12 x £100,000 plus 9/12 x £25,000.

Example 2

A company makes up its accounts to 30 September annually. For the six months to 30 September 2012, the limit on expenditure qualifying for the AIA is £12,500. For the year to 30 September 2012, the limit is calculated as follows:

October 2011 – March 2012 6/12 x £100,000 = £50,000
April – September 2012 6/12 x £25,000 = £12,500
Total £62,500

If, in the six months to March 2012, the company had already spent £35,000 on purchases of machinery, £35,000 would qualify for AIA. However, in the six months to September 2012 further purchases of up to £12,500 only would qualify for AIA.

Example 3

However, if the company spent £35,000 in the six months to September 2012, only £12,500 would qualify for AIA.

If you are planning any capital expenditure ensure that you get your timing right and make the most of your capital allowances position. Help us to help you by talking to us in advance of taking or not taking action!