T66 - Changes to Capital Allowances

Major changes to capital allowances for expenditure on plant & machinery (P&M), buildings & research & development (R&D) have been announced in the Budget & will take effect in 2008.

An important change will be the new annual 100% investment allowance for the first £50,000 of expenditure on P&M which will replace first-year capital allowances.

Our understanding is that if you spend more than £50,000, any excess over £50,000 will get capital allowances of 20% (from April 2008.)

In future years, you will get a further capital allowance of 20% on a reducing balance basis in subsequent years.

Currently, you get a capital allowance of 50% on all equipment purchases in their first year & a further capital allowance of 25% on a reducing balance basis in subsequent years.

In terms of the effect in the year of purchase, this change will mean higher tax relief unless you spend more than £100,000 in which case the previous regime would have meant more tax relief. Careful planning at this stage will ensure that you get tax relief in the most beneficial manner.

In simplistic terms, if you are going to be spending more than £100,000, it may be worth doing this before April 2008. If you are going to be spending less than £100,000, it may be beneficial to wait until after April 2008. Alternatively, spread purchasing equipment over more than one accounting period. For example, if you are going to spend £100,000 on equipment, do it in two phases - £50,000 in one accounting period and £50,000 in the next, so you can use the full Investment allowance in each period.