A series of wide-ranging reforms to the capital allowances were announced in the 2007 budget and are summarised below.

Annual Investment Allowance (AIA)
A new annual investment allowance is being introduced, giving an annual 100% allowance for the first £50,000 of investment in plant and machinery (other than cars) to all business regardless of size or legal form. The allowance replaces the current first year allowance of 50% for small businesses and 40% for medium-sized businesses. It is available to each individual business or company group.

Rate of writing down allowance

Plant and machinery
The main rate of capital allowances on the general pool of plant and machinery is being reduced from 25% to 20%.

Long life assets
The rate of capital allowances on the pool of long-life assets, which applies to assets with a useful life of more than 25 years is being increased from 6% to 10%.

Integral fixtures
Fixtures that are integral to a building are to have a separate classification and qualify for writing down allowance of 10% instead of 25%.

Industrial and agricultural building allowances
These are to be phased out by April 2011. The writing down allowance which currently is 4% reduces to 3% from April 2008, 2% from April 2009, 1% from April 2010.

Surrender of losses
New rules are being introduced to enable companies to surrender losses derived from enhanced capital allowances (for expenditure on certain environmentally beneficial types of plant and machinery) in return for a cash payment.

Research and development
The research and development tax credit for large companies increases from 125% to 130% and for small and medium-sized companies from 150% to 175%, subject to State aid clearance.