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George Bull
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Annual investment allowance doubled

The amount of capital expenditure by businesses that will qualify for relief is being doubled to £100,000 per annum from April. This will mostly benefit smaller businesses, who can now obtain a tax deduction for all of their qualifying spend each year, as they seldom spend more than the new limit.

Baker Tilly analysis

The ending from 31 March 2010 of the temporary 40% first year allowance on qualifying capital spend will be missed by large groups and companies that have a significant annual capital spend, as the doubling of the annual investment allowance will have little impact in relation to the size of their capital spend. For these entities, a reduction in corporate tax rates would have been a preferred option. However, the increase in the annual investment allowance will be welcomed by most other businesses, as it will mean for many of them that all their qualifying expenditure will be fully tax-deductible in future.

In detail

Companies may normally claim a corporation tax deduction on qualifying plant and machinery expenditure at the general rate of 20% or at a special rate of 10% for certain expenditure. A 100% allowance, known as the annual investment allowance, has been available for some time on the first £50,000 of this qualifying expenditure (excluding certain expenditure, such as cars). Groups of companies and certain other related companies benefit from only one annual investment allowance.

The Budget proposes that this £50,000 be increased to £100,000 for expenditure incurred on or after 1 April 2010. For companies with accounting periods spanning the change, the total allowance available will be calculated by reference to the length of the periods falling before and after 1 April. For example, for a company with a 31 December 2010 year end, its annual investment allowance will be £87,500 (calculated as 3/12 x £50,000 + 9/12 x £100,000) with the maximum expenditure qualifying in the period to 31 March 2010 being £50,000.

Targeted anti-avoidance rules are also proposed. These will disallow property loss relief against general income to the extent that the loss is attributable to annual investment allowance as a result of relevant avoidance arrangements entered into after 24 March 2010.