BUDGET MARCH 2011 – CAPITAL ALLOWANCES MAKE HEADLINES!
23 March 2011
The Chancellor presented his budget today with the by-line of promoting growth to the UK economy and delivered a speech with several surprises. We as specialist capital allowances advisers found ourselves busier than expected.
Several measures we knew were coming – such as the already announced plant and machinery and integral features rates reduction, but the changes to short life assets rules and the confirmation of the abolition of land remediation tax relief were more of a surprise, although not entirely unexpected, thanks to the recent Office of Tax Simplification (OTS) recommendations .
Capital Allowances – Short Life Assets (SLA)
Currently short life asset elections are used by businesses that expect to scrap or sell assets within 4 years to gain the benefit of a balancing allowance on disposal, with writing down allowances currently set at 20% per annum reducing basis.
The short life asset election was identified in the recent OTS report as a relief that should be retained but with increased clarity given to the assets that could fall within the rules. Instead of merely providing clarity, the Chancellor has extended the period that these assets can be held from
4 years to 8 years – with the rationale being that businesses investing in large items of plant that tend to depreciate faster than the rate of capital allowances, can now also benefit from the SLA.
Certain assets cannot benefit from SLA treatment and these include integral features of a building (such as heating and air conditioning), cars and long life assets.
Viewpoint
The biggest barrier to take up of the election has always been the administrative burden of tracking and logging individual assets subject to the SLA treatment, and it remains to be seen whether the welcome incentive of receiving an early balancing allowance for business will outweigh the additional compliance burden.
Abolition of Land Remediation Tax Relief (LRTR)
Following the publication of the OTS Report, LRTR was identified as a tax relief that was ineffective in encouraging the regeneration of brownfield land and that should be abolished. The Chancellor confirmed today that he was going to go ahead with this measure, and will abolish this relief after 2012 following a period of consultation.
Viewpoint
Whilst we recognise that there are barriers to take up of this relief, its abolition seems rather hasty, given the prior substantial and lengthy 5 year review and relief extensions. Removing the relief will be to the substantial disadvantage of developers and investors alike. We have not heard what, if anything, the Government intends to replace this tax relief with and the abolition seems to be contrary to the general policy that tax should influence behaviour.
It is possible that the revisions and relaxation of planning policy are intended to fill the gap that the removal of this valuable tax relief will create, but we remain to be convinced that the reduction in planning red tape will off-set the financial implications of expensive land remediation.
Capital Allowances - Fixtures mandatory pooling
Consultation has been announced on measures to ensure that business must pool their expenditure on fixtures in a building within a ‘short period’ of acquiring the building in order to qualify for allowances.
Capital Allowances – Anti avoidance legislation
Measures are to be introduced to tighten the anti-avoidance rules already contained within the capital allowances legislation. Currently the legislation applies to schemes or transactions where the sole or main benefit from the transaction is to obtain an allowance. The Government intends to remove any ambiguity in terminology, and will be consulting on the measure during May 2011 with a view to introducing legislation in Finance Bill 2012.
Enhanced Capital Allowances (ECAs) for energy saving technologies
Further additions are to be made to the list of qualifying technologies on which an ECAs may be claimed – specifically efficient hand driers and modifications to automatic metering and targeting equipment.
None of the simplification measures suggested by the OTS were mentioned by the Chancellor today.
Enterprise Zones
The Chancellor announced the formation of 21 new urban Enterprise Zones, with 10 being created immediately. Consideration is being given to introducing enhanced capital allowances to support these zones where there is a strong focus on high value manufacturing. No further detail is available from the Treasury on these measures, and we will wait to see whether the detail does actually deliver on the capital allowances potential. Mention was also made of more relaxed planning rules in these areas and up to 100% business rate discount for 5 years.
The first zones have been announced in the Local Enterprise Regions of
- Birmingham and Solihull;
- London (the Mayor will decide exactly where)
- Leeds City Region;
- Sheffield City Region;
- Liverpool City Region;
- Greater Manchester;
- West of England;
- Tees Valley;
- North Eastern;
- the Black Country; and
- Derby, Derbyshire, Nottingham and Nottinghamshire
Furnished Holiday Lettings
Following the ‘almost repeal’ of the FHL rules last year, there has been some uncertainty as to how the FHL rules would pan out. Currently capital allowances are available to owners of FHL properties as the income is effectively treated as business income. The new measures confirm capital allowances will continue to be available but that the period required for the properties to be let has increased, and the loss relief rules have been tightened. The new rules will be introduced in Finance Bill 2011.
Final confirmation of these seemingly fluid rules is to be welcomed and can assist tax payers planning expenditure and investment
Leasing Double Allowances
Legislation is to be introduced in Finance Bill 2011 to counter avoidance involving the leasing of plant and machinery under a long-funding lease finance lease, where relief greater than the actual expenditure incurred is claimed. The new legislation confirms that lessees engaging in transactions of this type will only be entitled to tax relief up to the actual amount of their expenditure.
Capital Allowances on Feed in Tariffs and Renewable Heat Incentives
Allowances are available to businesses involved in low carbon electricity and heat generation on their investment in generation equipment. This incentive sits alongside the governments feed in tariff scheme and the renewable heat incentive. Consultation is announced today that will clarify the rate of capital allowances available and ensure consistent treatment among businesses.
Business Premises Renovation Allowance
This relief was introduced to encourage investment in converting or renovating empty property within disadvantaged area and bringing it back into commercial use. Whilst the OTS attacked this relief as being ineffective in encouraging investment in these areas, and recommended its abolition, the Chancellor has instead extended the relief for a further 5 years from 2012.
Reliefs to be abolished
The Chancellor confirmed, following the publication of the OTS recommendations, that several reliefs are to be abolished after 2012, following consultation. 47 reliefs were identified in total, with LRTR (see above), flat conversion allowances and safety at sports grounds being relevant here.
Measures already announced
As announced in the June 2010 Budget:-
- Plant & Machinery writing down allowances will be reduced to 18 per cent for financial year 2012;
- Integral Features writing down allowance will be reduced to 8% for financial year 2012; and
- The Annual Investment Allowance will be reduced to £25,000 for financial year 2012.
Finance Bill 2011 will be published on 31 March 2011.
Click here to access the full Treasury ‘Overview of Tax Legislation and Rates’ document.