Short life assets extension the wrong move

The Chancellor’s announcement of a doubling of the period that can be covered by the short life assets rules is not the right move from a simplification point of view, says the Chartered Institute of Taxation (CIOT).

The short life asset (SLA) rules allow a business to claim better allowances on assets they sell or scrap within a defined period.

John Whiting, Tax Policy Director of the CIOT said:

“The problem with the SLA rules is that they require careful record keeping. Extending the period covered by this concession is attractive on the surface but only works for businesses that keep additional, more detailed records – for up to eight years. This sounds more like complexity in a budget notable for its moves on simplification. It would have been far better to improve the annual investment allowance limit which is due to be cut significantly next year.”

“In many cases the benefit of this measure will be of limited value, for example an asset which has been written down at 18% pa for eight years will only give rise to an additional allowance of around 20% of the original cost.”

Notes for editors

1. The capital allowance system allows purchase of plant and machinery to be written off on a reducing balance basis at a rate of 20% a year for most plant (some is at a reduced rate of 10%). The rates are due to reduce to 18%/8%. To help with short life assets – typically IT-related items – then if they are sold or scrapped in four years (to be extended to eight), then a balancing allowance on the asset can be claimed immediately, rather than have the balance written down on the 20% reducing balance basis.

2. The annual investment allowance, aimed at smaller businesses, allows a business to claim 100% of the cost of new equipment against taxable profits in the year of purchase. Currently the limit for this is £100,000 a year but this reduces to £25,000 from April 2012.