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This clause extends indefinitely at 40 per cent
the existing first year allowances ("FYAs") that were
introduced in 1997 for investments in machinery and plant by small
and medium-sized businesses. Without the extension, they would
have ended on 1 July 2000. This will enable small and medium-sized
businesses to plan their future investments with greater certainty
that FYAs will be available. FYAs can provide a cash flow benefit
on new investment and will help these businesses to grow and to
invest.
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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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The clause also changes the name used in the legislation
to describe the type of business that qualifies for the 40 per
cent FYAs from "small company" and "small business"
to "small and medium-sized enterprise". This paves the
way for the introduction in Clause 70 of FYAs at a rate of 100
per cent for spending by small enterprises on information and
communications technology.
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This name change does not affect the tests that
need to be satisfied to qualify for 40 per cent FYAs. 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.
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DETAILS OF THE CLAUSE
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Subsection (1) extends indefinitely the
period for which FYAs are given at 40 per cent on expenditure
by small and medium-sized businesses, which would otherwise have
ended on 1 July 2000.
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Subsection (2) substitutes the new term
"a small or medium sized enterprise" into the rules
for FYAs in the place of "a small business" and "a
small company. It makes it clear that the change, which applies
to all FYAs introduced for small and medium sized businesses since
they were first introduced in 1997 including temporary FYAs at
50 per cent in 1997, 40 per cent in subsequent years, and 100
per cent in Northern Ireland, is of nomenclature only.
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BACKGROUND
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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.
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Capital allowances are generally given on machinery
and plant at 25 per cent a year 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.
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Capital allowances are given on machinery and
plant with a useful economic life of 25 years or more (long-life
assets) at 6 per cent a year on the reducing balance basis. These
rules are restricted in the main to businesses spending more than
£100,000 a year on long-life assets, which excludes nearly all
small and medium-sized businesses.
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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. They were made available for
a further year in each of Finance Acts 1998 and 1999 at the rate
of 40 per cent.
