Are your capital allowances short lived?

If you are buying assets with a short economic life, a ‘short life asset’ election may be beneficial to you.

 Short life asset elections are an alternative form of capital allowances available on assets that are only expected to be in use by the business for 8 years or less. The most common type of asset is computer equipment, but may even extend to certain types of machinery and tools with a short usage span.

The relief is designed for assets with a high rate of depreciation. Where this is the case,  short life assets can be a more beneficial way of claiming capital allowances as relief will be accelerated where the asset is sold or scrapped from the business.

In this situation, it is likely that the business will benefit from a ‘balancing allowance’, whereby the difference between the disposal value and any leftover capital allowances is brought into account, effectively accelerating the tax relief for the asset in one tax period. If an SLA election is not made, relief will be restricted to a much slower rate, and may still be catching up after the asset is sold.

Example

A business buys machinery that needs renewing every 3 years for £270,000. It then sells the machine 3 years later for £20,000. The depreciation suffered is £250,000, but if the asset was placed in a general plant and machinery capital allowances pool, the relief after 3 years would have only been £121,000.

The short life asset election brings forward the remaining available allowances, by applying a balancing allowance equal to the difference between the disposal proceeds and any remaining allowances available. An additional £129,000 of tax relief is then given in the year of disposal, meaning the tax relief catches up with the depreciation suffered.

Making a claim

To make a claim on a particular asset:

  • The asset should be put into a separate capital allowances pool;
  • The election must be made within two years of the chargeable period in which the asset was bought; 
  • It must specify the asset, the cost and the date of expenditure.

Short life assets may be particularly attractive for businesses that have used up their annual investment allowance in a tax year (currently £500,000 for the period 1 April 2014-31 December 2015 and £200,000 for periods after) . If AIA is available, there is no merit in using an SLA election as AIA gives 100% relief up front. But in years where businesses incur high capital expenditure, it is a very useful alternative.