Capital Allowances: An Update

For a number of years, small and medium-sized businesses have been able to claim 40% first year allowances (FYAs) on most of their capital expenditure on plant and machinery. The main exceptions to this are long life assets where the annual allowance is restricted to 6%, cars where the annual allowance is 25% with a maximum of £3,000 and assets used in leasing.

A number of changes have recently been made to the rules and we summarise these below.
  1. The thresholds used to determine whether a business is small or medium-sized have been increased for financial years ending on or after 30 January 2004. The number of businesses eligible for FYAs has increased substantially as a result.

    The small company turnover threshold has been doubled to £5.6 million and the balance sheet total doubled to £2.8 million. The employee limit remains at 50.

    The medium-sized company turnover limit is increased from £11.2 million to £22.8 million and the balance sheet total increased to £11.4 million from £5.6 million. The employee limit remains at 250.

  2. The 100% FYA available to small businesses for expenditure on computers, software and internet-enabled mobile phones ran out on 31 March 2004.

  3. An enhanced 50% FYA is available to small businesses only for expenditure on plant and machinery for a 12 month period. The period runs from 1 April 2004 for companies and 6 April 2004 for unincorporated businesses.

  4. Certain specified energy saving plant and machinery continues to qualify for FYAs at 100%. This applies to businesses of any size not just small or medium-sized and includes cars with CO2 emissions not exceeding 120gm/km. Further details can be found at www.eca.gov.uk

Case study

A small business incurred the following capital expenditure during the year to 31 December 2004.

  • January - machinery - 40% FYA
  • February – computers - 100% FYA
  • May – computer software - 50% FYA
  • July – qualifying energy saving plant - 100% FYA
  • September - car with CO2 emissions of 178gm/km - 25% allowance restricted to £3,000
  • October - car with CO2 emissions of 117gm/km - 100% FYA
  • November - machinery - 50% FYA

As you can see the combination of all the rules has the potential to be a little confusing. Luckily you have us to advise you and to do the calculations for you. Please ask if you have any questions relating to capital expenditure you have planned for your business.

Summary

  • 100% allowances on computer equipment not available after 31 March 2004.
  • Increase in thresholds for small and medium-sized businesses.
  • New 50% FYA for small businesses for 12 month period.
  • 100% FYAs continue for energy saving plant and machinery.