In the Finance Bill 2011 the period over which expenditure on plant or machinery can be given “short life assets” (SLA) treatment was extend from 4 year to 8 years.
The change will have effect for expenditure incurred
• on or after 1 April 2011 for businesses within the charge to corporation tax (CT); and
• on or after 6 April 2011 for businesses within the charge to income tax.
If a business elects for plant or machinery to be treated as a short life asset, capital allowances are calculated individually on the asset until a “cut-off” point. This ensures that, if the asset is sold or scrapped before the cut-off point, the total allowances given over the period of ownership equal the actual net cost of the asset to the business.
An election will be beneficial if the asset depreciates faster than the rate at which capital allowances are given, and it is sold before the cut-off date.
Expenditure incurred on an asset given SLA treatment is allocated to a ‘single asset pool’ for the cut-off period. The current four-year cut-off period is four years from the end of the chargeable period in which the expenditure is incurred.
Writing-down allowances are given on the reducing-balance each year, currently at 18 per cent. If the item is scrapped or sold within a ‘four-year cut-off’ period, the remaining balance of expenditure in the pool is compared with the disposal proceeds. A further allowance, or charge, is made for the difference. This ensures that allowances given to this point match the actual net cost of the SLA.
If the Asset was placed in the Main Pool the tax relief would come through in future years through the WDA. So using the SLA will speed up Tax Allowances.
If the asset is not disposed of within the ‘four-year cut-off’ period, the remaining expenditure in the single asset pool is transferred to the main capital allowances pool, where writing-down allowances will continue to be available in the normal way.
The exceptions to SLA treatment are listed in section 84 CAA 2001 and include most cars and all expenditure on ‘long-life assets’ (assets with a useful economic life of at least 25-years) and ‘integral features’ of a building or structure.
A SLA election must be made for corporation tax within two years of the end of the relevant chargeable period in which the expenditure is incurred. For income tax the time limit is normally the anniversary of the 31 January following the tax year in which the end of the relevant chargeable period occurs.
Assets that cannot be treated as SLAs are:
- assets that were provided for some other purpose including leasing under a long funding lease before being brought into use for a qualifying activity CA23030;
- assets received as a gift CA23040;
- assets used for special leasing CA20040;
- cars apart from cars hired out to people in receipt of certain disability allowances CA23510;
- long life assets CA23700;
- special rate expenditure assets CA20150;
- assets provided for leasing except:
- those used in the designated period for a qualifying purpose and for no other purpose; and
- cars provided for disabled people in receipt of certain allowances;
- assets leased overseas that qualify for WDAs at the 10% rate CA24200;
- assets leased to two or more persons jointly where at least one lessee is a non- resident who does not use the asset exclusively for earning profits chargeable to tax and the leasing is not protected leasing CA24400;
- ships CA25000;
- assets used partly for a qualifying activity and partly for other purposes CA27000;
- assets that receive a partial depreciation subsidy CA27100.