Enter Your E-mail

Stephen Dunham of Dunham Consulting looks at ways for businesses to strike back against the trend of increasing taxes through capital allowances.

Introduction

With HM Revenue & Customs (HMRC) taking an ever-increasing hardline and aggressive approach in their attempts to increase the tax take from both corporates and individuals alike, now more than ever is the time to ensure the maximum level of capital allowances is being identified and utilised to assist in minimising tax liabilities and paying the correct amount of tax.

The major changes to the capital allowances regime contained in Finance Act 2008, with the reduction in the main writing-down allowance (WDA) for plant and machinery from 25% to 20%, the introduction of the integral features asset class with a 10% WDA and the phasing out of Industrial, Hotel and Agricultural Building Allowances (IBA/HBA/ABA) up to April 2011 with no further allowances beyond this date, will put upward pressure on a business’ tax liabilities.

Therefore businesses must take a proactive approach to enable all tax reliefs to which they are entitled are utilised effectively and efficiently.

Historic Review and the Oppotunity to Improve the Capital Allowances Position

It is highly likely that businesses have understated the level of available tax relief and are missing out on unclaimed cash tax savings in connection with expenditure incurred in acquiring, constructing or refurbishing buildings or property over the last ten years or so.

A historic review of the capital allowances position could result in an increase in eligible expenditure for capital allowances by up to 40%, even if the expenditure relates to tax return periods that are now closed. Tax returns that are still open can be amended and for those which are now closed, any new eligible expenditure can be added to the relevant capital allowances pools in later returns. The result is additional tax relief and where this involves the restating of prior year returns, the potential for real cash tax repayments arises. 

Those businesses currently claiming IBA/HBA/ABA should consider whether any of this expenditure could be reclassified as plant and machinery or building reparatory works. This will substantially accelerate tax relief for periods to 2011 but, more crucially, avoid the permanent loss of tax relief post 2011 once IBA/HBA/ABAs are abolished. For plant and machinery, any reclassification can only take place in open periods which means there should be at least two years of open expenditure to consider. For capitalised repairs, where previously it was possible to go back up to six years, this has now been reduced to four years, subject to some transitional arrangements, using an error or mistake claim. As a rough guide, for £1m of capital expenditure treated as industrial buildings in the period to 31 March 2008, £900k of this will not be eligible for tax relief.  Reclassifying £500k of this expenditure to plant and machinery or capitalised revenue could produce an additional cash benefit, to a corporate taxpayer, in the region of £120k over time.

For capital expenditure incurred on projects after 1 April 2008, the widening of the scope of eligible expenditure provides for additional tax relief to be obtained and advantage also needs to be taken of the Enhanced Capital Allowances  (ECA) scheme, which provides 100% first year allowances on certain energy saving and environmentally beneficial plant and machinery for those assets on the Energy Technology List and Water Technology List. It is also now possible for companies to claim a repayable tax credit for ECA expenditure where the company is in a loss-making situation when the expenditure is incurred. This is in the form of a 19% tax credit and subject to a maximum payment of either £250,000 or the level of PAYE and NI liabilities, whichever is the greatest.

Conclusion

In conclusion, while HMRC’s hardening and increasingly aggressive attitude has the potential to increase tax liabilities for businesses, tax relief is out there to assist in mitigating any increase. Those businesses which will be successful in achieving this will be those who take a proactive approach to capital allowances to unlock the potential that is there.