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11. Capital allowances

The Government continues to use tax as a lever to encourage particular activities or behaviours. Businesses as well as individuals benefit from the tax reliefs offered. Capital allowances are an obvious example of how substantial (sometimes 100%) tax relief on expenditure can positively affect investment decisions made by businesses.

The potential for significant reform to capital allowances was however raised in the consultative document of August 2002 on corporation tax reform. Broadly speaking, the possibility of aligning accounting and tax practice in respect of capital expenditure was discussed, meaning the possible abolition of capital allowances – as we know them. That hasnt happened and it would appear that the Government has initially concluded against alignment of capital allowances with accounts depreciation. However, modernisation has not been ruled out. This year we have had a very attractive proposal made that will benefit all small businesses investing in plant and machinery.

Last year, for small businesses investing in plant and machinery rates of first year allowances for spending on or after 1 April 2004 on most plant and machinery was increased from 40% to 50% for a period to 31 March 2005. This increased allowance does not appear to have been extended.

Once state aid approval has been granted, a 100% first year allowance will be available for capital expenditure on renovating or converting vacant business properties that have been vacant for at least a year in designated disadvantaged areas. This allowance will be known as the business premises renovation allowance and will benefit any individual or company, who incurs capital expenditure on bringing qualifying business premises (owned or let) back into business use.

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