REV BN 38 - Increase in rate of first-year Capital Allowances for small businesses

Who is likely to be affected?

1. Small businesses investing in plant and machinery.

General description of the measure

2. The rate of first-year capital allowances for small businesses spending on most plant and machinery will be increased from 40% to 50% for a period of one year.

Operative date

3. To spending incurred on or after 1 April 2004 for businesses in the charge to corporation tax, and on or after 6 April 2004 for businesses in the charge to income tax.

Current law and proposed revisions

5. Capital allowances allow the cost of capital assets to be written off against a business's taxable profits. They take the place of commercial depreciation charged in commercial accounts. The main rate of capital allowances for general spending on plant and machinery is 25% a year on the reducing balance basis. First year allowances (FYAs) bring forward the time that tax relief is available for capital spending and allow a greater proportion of the cost of an investment to qualify for tax relief against a business's profits of the period during which the investment is made.

4. Small and medium-sized enterprises can claim 40% FYAs on their investments in most plant and machinery. There are some exceptions, including spending on long-life assets, cars and assets for leasing.

5. This measure will increase the rate of FYAs for small enterprises only, from 40% to 50% for a period of one year, providing an increased cash-flow benefit for small businesses’ investment in plant and machinery. The rate of FYAs for medium-sized enterprises remains unchanged at 40%.

Further advice

6. If you have any questions about this change, please contact your local tax office.

www.inlandrevenue.gov.uk