EMERGENCY BUDGET JUNE 2010 - CAPITAL ALLOWANCES REMAIN RELATIVELY UNTOUCHED WITH WITH SMALL RATE REDUCTIONS IN TWO YEARS TIME

Capital Allowances – Changes afoot again but it could have been much, much worse!

The much anticipated first coalition emergency budget was delivered on 22 June with all sectors feeling the ‘country’s pain’. The business community were also targeted with the very important, but probably underappreciated, capital allowances bearing the brunt of the changes.

Whilst corporation tax was reduced, albeit at a far slower rate than large businesses would have liked, capital allowances will also be reduced to pay for that change. It is, however, a good example of expectation management, since most will be left thinking it could have been worse, with something much more severe happening much sooner.

Capital allowances are the only real relief available to businesses investing in capital assets – be that through investment in plant & machinery or property. The rates for both the main and special rate (including integral features) allowances will be reduced by 2% for periods ending after April 2012, taking the rate down to 18% per annum for the main pool and 8% per annum for the special rate. Businesses will feel this drop in relief, and together with the complications of using hybrid rates during the transitional periods, it will increase their already considerable compliance burden.

Furthermore, the annual investment allowance was reduced from £100,000 to £25,000, again from April 2012. The annual investment allowance is an important incentive, particularly for small businesses, which gives full relief for plant & machinery expenditure incurred up to the set limit, so this is particularly harsh for them in what are still very challenging times.

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