Plant buyers urged to rethink funding options

Companies buying plant must reconsider their funding options in the wake of the 'credit crunch' and the new tax regime that started in April, warns Nigel Greenaway, marketing manager at JCB Finance. Although companies spending just £50,000 per year on capital equipment will be better off from a tax situation, capital intensive industries such as construction plant may suffer.

"The old rules which allowed small firms to claim up to half the capital cost of new plant against tax in the first year have disappeared. Now, the new Annual Investment Allowance (AIA) enables all companies to claim 100% of the first £50,000 in the first year plus 20% of the remaining cost of the machinery," said Greenaway.

Annual write-down allowances have also been cut to 20% on the reducing balance.

"Under the old rules you could write off 90% of a machine's value against tax in eight years, for investments costing well in excess of £50,000 this will now take 10 years," said Greenaway.

"Companies making large capital investments have to be prepared for a higher demand from the taxman and this will have a detrimental effect on cashflow."

However, Greenaway said those buying a £50,000 machine can claim the full AIA allowance while only spending £18,750 in the first year of a three year HP agreement. He added that the situation for companies running plant on lease agreements can still claim 100% of the payments against taxable profits.

"Such arrangements keeps cash in the bank and the most often cited reason for business failing is lack of working capital," he concluded.

For more information see Note BN08 and BN12 at www.hmrc.gov.uk/budget2008/notes-pdf.htm