Buried in the recent budget was a tax-saving opportunity using the short-life asset election for capital allowances. It will become very relevant when the Annual Investment Allowances is dramatically reduced in 2012/13.
For the 2011/12 tax year, businesses can claim 100% capital allowances on all capital expenditure up to £100,000 (Annual Investment Allowance). This will be sufficient for most owner-managed businesses.
However, for 2012/13, the Annual Investment Allowance (AIA) is reduced to £25,000. Any capital expenditure in excess of this will receive a writing down allowance of 20% per annum.
So, lets say you buy a new computer system for £10,000 in June, 2012 (and you have already used up your £25,000 AIA for that year), then over the next 5 years you get a total of £6,723 capital allowances to reduce your taxable profit. You then scrap the computer and buy another one. Capital allowances continue to be claimed on the original expenditure but these become smaller and smaller annual deductions. It takes a further 12 years before you have been able to reclaim 95% of the asset cost against taxable profits.
The Chancellor announced that the cut-off period for short-life assets (SLA) will be extended to eight years thus making the election more attractive for a wider category of assets. The measure takes effect for expenditure incurred by companies on or after 1 April 2011 and 6 April for unincorporated businesses. Cars cannot be treated as short-life assets (unfortunately).
In our example above, if an election had been properly filed with HM Revenue and Customs that the computer was a SLA, then on disposal it would have been possible to claim a “balancing allowance” of £3,277 in year 5.
This is a complicated area. You should assure yourself that your accountant is aware of this opportunity so that you do not lose out. Of course, we would be delighted to help.