Capital Allowance and the Budget 2018
In his Budget speech on 29th October, the Chancellor announced significant changes to the capital allowances regime intended to stimulate business investment in the economy.
These changes include:
- The introduction of a new category of capital allowances known as the Structures and Buildings Allowance.
- The reduction of the writing down allowance for assets in the “special rate” pool from 8% to 6%.
- A temporary increase in the Annual Investment Allowance from £200,000 to £1 million.
Structures and Buildings Allowance
The new Structures and Buildings Allowance (SBA) will provide tax relief for the cost of constructing new commercial buildings or for converting or renovating existing commercial buildings. It will apply to expenditure incurred under construction contracts entered into on or after 29th October 2018.
The new allowance will be available for the costs of physically constructing commercial structures or buildings which will include offices, retail outlets, factories and warehouses, walls, bridges and tunnels – although there will be no relief for the cost of the underlying land. Dwellings are specifically excluded from the relief. Eligible expenditure will include the cost of demolishing existing buildings and any necessary land alterations as well as the direct construction costs of the new building or structure.
Allowances will be given at a flat rate of 2% per annum over a period of 50 years. There will be no system of balancing allowances and charges if the building is sold within the 50 year period. Instead, the new owner will be able to claim writing down allowances for the remainder of the 50 year period provided that the building continues to be used in a qualifying activity.
Integral features and fixtures (for example, lighting or heating systems) within the structure of a building will continue to qualify as “plant and machinery” and, therefore, will continue to benefit from the Annual Investment Allowance and the special rate of writing down allowances.
Special Rate of Capital Allowances
Expenditure on plant and machinery will generally qualify for capital allowances as part of the “main” pool and obtain writing down allowances at the rate of 18%. However, certain types of assets, including long-life assets and integral features (for example, water systems and heating systems) only qualify for writing down allowances at a lower “special rate”. This is currently 8% per annum but, with effect from April 2019, the special rate of writing down allowance will be reduced to 6%.
Businesses will continue to receive full tax relief for the cost of these assets but over a longer period.
Annual Investment Allowance
The Annual Investment Allowance (AIA) is effectively a 100% up-front allowance for capital expenditure on qualifying plant and machinery. It has been set at £200,000 since 2016.
The Chancellor has announced a temporary increase in this allowance from £200,000 to £1 million for expenditure incurred between 1 January 2019 and 31 December 2020. Thereafter, the AIA will revert to its current level.
This measure is designed to encourage businesses to increase or bring forward their capital expenditure on plant and machinery. It offers a potentially significant tax benefit for many small and medium sized businesses.
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