Budget 2007 - capital allowances

When you buy certain capital assets to use in your business, you are allowed to write off part of the cost each tax year, to take into account any depreciation to the asset. Whatever you write off this way can be deducted from your taxable profits, or added to your allowable losses.

You are not allowed to use whatever depreciation rules you like, rather the taxman has set particular rates that you must use.

You can currently deduct as follows:

• deduction for plant and machinery: 25% of cost on a 'reducing balance' basis.
• 'long life' assets: 6% of cost on a 'reducing balance' basis.

There is also a 40% deduction in the first year for plant and machinery, but small companies may claim 50%.

'Reducing balance' basis means that every tax year, you deduct the relevant percentage from whatever the balance is at the end of the previous tax year. So if, for example, you have a qualifying asset that cost £1,000, you can deduct 25% ie £250. For the next tax year, you deduct 25% of the reduced balance, ie not the original cost of £1,000, but the reduced balance of £1,000 - £250 = £750. So the next year's allowance will be £750 x 25% = £187.50. And so on and so forth.

Anyway, hurrah! Uncle Gordon has decided to increase the rate for deduction of long-life assets to 10% (a 4% increase).

Don't rejoice so much, though. This is Uncle Gordon, after all. Whatever he gives, he always takes back. And more.

He has decided to decrease the rate of deduction for plant and machinery to 20% (a 5% reduction).

These changes take effect from April 2008.

Small consolation though, the 50% deduction in the first year is still available for small companies. Until next April, at least.

The taxman is making vague promises about an allowance for the first £50,000 of expenditure on plant and machinery, but no concrete details yet. We will wait and see how it works in real life.