EXPLANATORY NOTE

This Clause provides for a further year’s extension of enhanced first year capital allowances ("FYAs") to small and medium-sized businesses for investment in machinery and plant. The rate applicable to expenditure in the year ending 1 July 2000 will remain at 40 per cent.

FYAs for small and medium-sized businesses were introduced in Finance Act (No.2) 1997 for spending up to 1 July 1998 at the rate of 50 per cent and made available for a further year in Finance Act 1998 at the rate of 40 per cent. This Clause extends FYAs at 40 per cent for another year, covering spending up to 1 July 2000. This will give small and medium-sized businesses a cash flow benefit on new investment and will help them to grow and to invest.

The definition of business qualifying for FYAs remains unchanged. The businesses that qualify are broadly companies and businesses carried on by individuals, either as sole traders or in partnership, which are small or medium-sized under the criteria in the Companies Act.

As before, FYAs are not available for expenditure on machinery and plant for leasing or letting on hire, cars, sea-going ships, railway assets or long-life assets.

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Clause 69 amends subsection (3D) of the Capital Allowances Act 1990 which provides for FYAs to be given on expenditure (other than expenditure on long-life assets) incurred by a "small company" or "small business" during the period 2 July 1998 to 1 July 1999, extending this period so that it ends on 1 July 2000.

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Capital allowances allow the cost of capital assets to be written off against the taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax.

Capital allowances are generally given on machinery and plant at 25 per cent per annum on the reducing balance basis. There are special rules which allow expenditure on machinery and plant with a life of less than 5 years (short-life assets) to be written off more quickly.