First-year Capital Allowances for Small Businesses
The rate of first-year allowance for expenditure on plant and machinery by small businesses (i.e. those already classed as ‘small enterprises’ for capital allowances purposes) is increased from 40% to 50% for one year only. The increased rate will apply to expenditure in the tax year 2006/07 for income tax purposes or in the 12 months from 1 April 2006 for corporation tax purposes. The rate for expenditure by medium-sized enterprises remains at 40%. Broadly, a ‘small enterprise’ is one which satisfies at least two of the following three conditions: turnover not exceeding £5.6 million, assets not exceeding £2.8 million, number of employees not exceeding 50.

Leased Plant and Machinery
As previously announced, the tax treatment of leased plant and machinery is to be brought into line with the treatment of plant and machinery acquired using other forms of finance. The new rules will apply to longer leases, to be known as ‘long funding leases’, which are essentially financing transactions. Leases of less than five years and, where certain conditions are met, of between five and seven years are generally excluded. Lessors will be able to make an election for the provisions to apply to certain leases which would otherwise be excluded where the value of the lease does not exceed £10 million. Special rules will apply to leases of ships to companies within the tonnage tax regime.

Where a lease falls within the provisions, the lessor will not be able to claim capital allowances and will be taxed only on the proportion of rentals that reflects the financing charges. The lessee will be able to claim capital allowances on an amount similar to that which would have applied had they bought the asset and will be able to obtain a deduction for that part of the rentals on which such allowances are not available.

The new provisions will apply, subject to transitional rules, to leases finalised on or after 1 April 2006.

In addition to these changes, minor amendments are to be made to the legislation applying to first-year allowances for lessors, plant and machinery acquired using hire purchase and certain finance costs incurred by companies carrying on oil extraction activities.

Landlords’ Energy Saving Allowance
Landlords who pay income tax may already claim a deduction (the Landlords’ Energy Saving Allowance (LESA)) against profits for expenditure to install loft insulation, cavity wall insulation or solid wall insulation in a dwelling house which they let. The maximum amount which may be claimed is limited to £1,500 per building.

With effect from 6 April 2006, the scope of the allowance is extended to include draught proofing and insulation for hot water systems.