BN06 - Extension of Increased Rate of First-year Capital Allowances for Small Businesses

Who is likely to be affected?

The temporary 50% rate of first-year capital allowances for small businesses spending on most plant and machinery will be extended for a further period of one year.

The extension will apply to spending incurred on or after 1 April 2007 for businesses in the charge to corporation tax, and on or after 6 April 2007 for businesses in the charge to income tax.

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 or 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.
The amounts of FYAs are set out in section 52 of the Capital Allowances Act 2001. Small and medium-sized enterprises can normally 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.
Finance Act 2006 increased the rate of FYAs for small businesses only, from 40% to 50% for a period of one year. This extension for a further year provides an increased cash-flow benefit for small business’s investments in plant and machinery. The rate of FYAs for medium-sized enterprises remains unchanged at 40%.
There are various reforms to the capital allowances system proposed for 2008-09 (see BN 02) including the replacement of FYAs for small and medium-sized businesses by an annual investment allowance of £50,000 a year.

If you have any questions about this change, please contact your local HM Revenue and Customs office.

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