From April 2008, spending on capital items such as new telephone systems will qualify for a 100 per cent tax break, up to an annual limit of £50,000. This will create opportunities for smaller businesses to significantly reduce their tax bills by deferring purchases until next tax year when this generous tax break becomes available.
"The present system means 100 per cent allowances are normally available only on certain environmentally friendly equipment," explained David Teale, director of tax at UK accountants and business advisers DTE.
"Otherwise, the current relief for plant and machinery is usually 50 per cent for smaller businesses in the first year after purchase. So taking advantage of the 100 per cent relief on spending up to the £50,000 annual limit can add significantly to your bottom line performance - but only from 6 April 2008."
David Teale believes many companies may not be aware that the reform process is already under way because the proposals are still in the consultation stage. "However, an outline of the government's thinking is available and may be relevant now to investment planning decisions," he said.
Further changes to the rules are expected for so-called 'integral fixtures'. These are items such as air conditioning, central heating, and lifts, which are part of the fabric of a building, but still qualify for the plant and machinery allowances.
"The rate of allowance for integral fixtures is to be reduced next year (2008/09) from the current 25 per cent annual allowance down to 10 per cent.
Therefore, reviewing buildings now to see whether a claim could be made for at least one year at the higher rate may be worth doing," commented David Teale.
"On the other hand, items such as cold water supply and electrical wiring, that usually do not qualify for a tax break at present, may be included for the 10 per cent rate."
The rules for taking advantage of this tax break are complex which means specialist advice will be needed, but both these changes could be a good reason for a business to review its strategic position.
David Teale adds: "Because the changes to the capital allowances regime have been announced well in advance and involve a consultation process, it is easy for business people and their advisers to put the matter to one side.
"In fact, they should be reviewing their investment decisions in the light of these proposals before committing themselves to a course of action which may add to their overall tax bill."