As of April, 2012, Capital Allowances are set to fall to 18% per annum (on a reducing basis). This means should you invest £10,000 into a piece of machinery you will only get £1,800 in allowances during the first year, approximately £1,480 the second and so on and so forth (a total of £8,000 in allowances in 8 years).

And herein lies the problem with this system. What if the machinery does not last that long? What if it wears out in 4 years, not 8? What can you do?

In the past businesses wouldn’t have been able to do anything. Instead the cost of the machine would have gone into their ‘general’ pool of expenditure with tax deductions lagging years behind the actual costs.

So, what has changed?

Fortunately, the Government recognised this problem and offered a solution: the introduction of ‘Short Life Asset’ rules.

Under these rules a P&M with an expected life of under four years could be examined in isolation and receive a balance of the cost as a tax deduction in the year it wore out.

However, these rules still did not accommodate for everything and created 2 new problems:

1. The shortness of the rule – 4 years is too short, meaning P&M’s which lasted longer couldn’t benefit.
2. An election had to be made for each asset with each asset then being tracked.

So whilst these rules are all well and good for a £100,000 piece of machinery that falls apart after 3 years. These rules do not accurately reflect the fact that 1) most expensive assets generally last longer and 2) cheaper assets are too costly and difficult to monitor.

Luckily, each of these problems has been resolved by the Government and H M Revenue & Customs.

What have they proposed?

Firstly the government has announced plans to extend the four year period to eight years. Secondly, if you can provide a convincing case to the HMRC, they will accept a Short Life Asset election for a ‘group’ of similar assets. As the following example clearly shows:

If for instance a restaurant chain buys a thousand plates every year, (too many to keep track of), they could potentially negotiate a deal with the HMRC where each year’s expenditure is treated as an asset that will last for example three years. By doing so, the full cost can be set off against tax over the real economic life of the asset.

And this is great news for businesses that spend a lot of money on assets which last less than eight years. Under this new scheme, they can utilise Short Life Asset elections to help speed up their tax deductions and ultimately improve their cash flow.