The Chancellor’s announcement of a temporary five-fold increase in the Annual Investment Allowance (AIA) will be welcomed by many small and medium sized businesses looking to incur significant capital expenditure on plant and machinery.

The Annual Investment Allowance (AIA) was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. The announcement by the Chancellor provides for a temporary increase in the allowance to £1 million for a 2 year period from 1 January 2019 to 31 December 2020.

The AIA allows for 100% first year tax relief for qualifying expenditure on plant and machinery. It can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Partnerships or trusts with individuals and companies in the business structure do not qualify for the AIA. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

Businesses thinking of incurring large items of capital expenditure over the coming months should ensure that any purchase is properly timed to take full advantage of the temporary increase in the AIA limit.

The tax treatment of the sale of fixtures and fittings included in the sale or purchase of a commercial building changed from April 2014. From that date, the buyer of a building that contains fixtures can only claim plant and machinery allowances (PMA) if the expenditure on the fixtures is pooled before the sale.

The seller and buyer must also either:

• formally agree a value for fixtures within 2 years of a transfer
• start formal proceedings to agree the value within that time

The formal agreement to satisfy the fixed value requirement is usually achieved when the buyer and the seller make a valid tax election known as a Section 198 claim.

This election effectively binds both the seller and purchaser of a commercial property to an agreed valuation for fixtures and fittings included in the sale. The election is irrevocable and cannot be subsequently changed.

There is a lower Writing Down Allowances (WDA) rate of 8% available for certain long life assets and integral features. A standard 18% WDA is available for fixtures and fittings that do not qualify for the lower 8% rate.

Enterprise zones were first launched in 2011 and are specific geographic areas that provide various tax breaks and Government support. Businesses that set-up in enterprise zones can benefit from up to a 100% business rate discount worth up to £275,000 over a five-year period or 100% enhanced capital allowances (ECA) tax relief for qualifying investments in plant and machinery.

A new set of maps has been published that lists sites within enterprise zones that qualify for the ECA 100% first-year allowances for investments in new plant and machinery until 31 March 2020.

The qualifying list includes specific locations in the Humber Enterprise Zone, North East Enterprise Zone, Tees Valley Enterprise Zone, Deeside Enterprise Zone, Renewables East Enterprise Area, Renewables North Enterprise Area, Black Country Enterprise Zone, Wirral Enterprise Zone, Redcar and Cleveland and Oceansgate Enterprise Zone.

Planning note

In addition, businesses based in an enterprise zone can benefit from radically simplified planning permission for certain developments. All business rates growth within a specific enterprise zone for a period of at least 25 years will be retained and shared by the local authorities in the relevant local enterprise partnership’s area in order to support local economic priorities.

If your business is located in an Enterprise Zone we can help you make the most of any grants or tax breaks available. Please call for more information.

Most day to day business expenses can be deducted from business income when calculating your taxable profits. However, the rules are different for ‘capital’ expenditure’. Capital allowances is the term used to describe the allowances which allow businesses to secure tax relief for certain capital expenditure. There are different rules that apply depending on the type of capital expenditure, and only the person who bought the item can claim a capital allowance.

We will focus below on what plant and machinery purchases HMRC says qualifies for a tax allowance.

Plant and machinery includes:

• items that you keep using in your business, including cars
• costs of demolishing plant and machinery
• parts of a building considered integral, known as ‘integral features’
• some fixtures, e.g. fitted kitchens or bathroom suites
• alterations to a building to install other plant and machinery – this doesn’t include repairs

Integral features include:

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

You can’t claim capital allowances on:

• things you lease – you must own them
• buildings, including doors, gates, shutters, mains water and gas systems
• land and structures, e.g. bridges, roads, docks
• items used only for business entertainment, e.g. a yacht or karaoke machine.