03: Plant and machinery
Most expenditure that qualifies for plant and machinery allowances is ‘pooled’ and a writing-down allowance is given each year on the balance of expenditure in the pool. When a pooled asset is sold, the proceeds are deducted from the pool balance before calculating the writing-down allowance. If the proceeds are greater than the pool balance, the excess – called a balancing charge – is added to the profits.
A balancing charge is also made if a non-pooled item is sold for more than its written-down value. If the sale proceeds are less than the written-down value, the resultant balancing allowance will reduce profits. Balancing allowances and charges may also arise when a business ends. The current writing-down allowance is normally 25%.
Small businesses can claim a first-year allowance of 50% in the year to 31 March 2008 for companies and to 5 April 2008 for unincorporated businesses. The first-year allowance is 40% for medium-sized businesses. The balance of the cost enters the expenditure pool in the following year.
First-year allowances of 100% are available to businesses of any size for qualifying energy-saving or water-efficient equipment and for low emission cars. These are new cars with CO2 emissions of not more than 120g/km.
Short-life plant and machinery may benefit from accelerated capital allowances if an election is made. An asset has a short life if it is not expected to last more than four years after the end of the period in which it was acquired.
Cars costing over £12,000, other than low emission cars, are not pooled and allowances are calculated on each car individually. They do not qualify for a first-year allowance and the maximum writing-down allowance is £3,000.
Assets used partly outside the business are also not pooled and allowances are restricted by reference to the proportion of non-business use.
A new system of capital allowances will operate from April 2008. There will be a new annual investment allowance for the first £50,000 of expenditure on plant and machinery, the details of which are yet to be published. Writing down allowances will change from 2008/09. For most plant and machinery the rate will fall to 20% from the current rate of 25%.
