Since the Covid-19 pandemic the levels of business investment have fallen with a year-on-year reduction of 11.6 %. Therefore, to counter this trend, the government has introduced a new Capital Allowance regime to ensure that the UK is more internationally competitive and to stimulate growth. Effective from 1st April 2021 until the end of March 2023, companies can now claim 130% Capital Allowances on qualifying plant and machinery investments. This means that under the Super-Deduction, every pound a company invests, their taxes are cut by up to 25 pence.
What are Capital Allowances?
Capital Allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax-deductible. Businesses deduct Capital Allowances when computing their taxable profits.
What do the new Capital Allowances offer?
As a result of measures announced at this Budget, business will now benefit from four significant Capital Allowance measures:
- The Super-Deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies
- The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies
- Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold, until 31 December 2021
- Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026
What is Plant and Machinery?
Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming Capital Allowance. There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for either the Super-Deduction or the 50% FYA include, but are not limited to:
- Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks,
- Electric vehicle charge points
- Refrigeration units
So, let’s look at some examples of the Super-Deduction in practice
- A company incurring £1m of qualifying expenditure decides to claim the Super-Deduction
- Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits
- Deducting £1.3m from taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill
- A company spends £10m on qualifying assets
- Deducts £1m using the AIA in year 1, leaving £9m
- Deducts £1.62m using WDAs at 18%
- Deductions total £2.62m – and a tax saving of 19% x £2.62m – £497,800
- The same company spends £10m on qualifying assets
- Deducts £13m using the super-deduction in year 1
- Receives a tax saving of 19% x £13m = £2.47m
Yes, you really did read that correctly, based on this example, there would be a further tax saving of nearly £2,000,000! The introduction of the new measures provides companies with a strong incentive to make additional investments and bring planned investment forward.
Other conditions to keep in mind
- Both allowances apply only to companies who pay corporation tax.
- The 130% super-deduction and 50% FYA apply only to plant and machinery that is new and unused.
- The 130% super-deduction and 50% FYA do not apply to second-hand plant and machinery.
- The relief is in accordance with accounting periods that straddle 1 April 2021 and 31 March 2023.
- There is no expenditure limit on either the 130% super-deduction or 50% FYA.
While both the super-deduction and FYA are generous as tax and business growth incentives, there are some exclusions that you should keep in mind in case they apply to your business:
- Both allowances are only available to companies, not sole traders, LLPs or partnerships.
- Both allowances are also only available for contracts entered into after 3 March 2021. Any projects that have already been committed to before or during the course of the pandemic, and that may have been mothballed only to receive the allowances, will not qualify.
- The allowances are not available to landlords who are investing the construction of new property or the refurbishment of existing premises.
- Cars are excluded. However, vehicles that are not deemed cars are eligible (i.e. vans, motorbikes, generally any vehicle used for trading purposes that is not a car)