The Chancellor of the Exchequer announced during the budget statement on 3 March 2021, two major capital allowance measures to encourage businesses to invest in capital expenditure to grow and assist with the economic recovery as a result of the UK’s departure from the EU and the Covid-19 pandemic.
These two new measures are:
- The Super-Deduction – A measure to provide 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 items until 31 March 2023 for companies
New and unused items only
To qualify, the items must be new or unused, but there are certain relaxations where the item being purchased is a preregistered demonstration product (like a commercial vehicle). In certain circumstances, these can be treated as new and not second hand.
Contracts entered prior to 3 March 2021
If the capital expenditure is incurred as the result of a contract entered in before 3 March 2021 then, whilst the invoice date may be after 01 April 2023, it will not be entitled to the two measures outlined above and will be subject to normal allowances. The Annual Investment Allowance will be available as normal.
To stop companies cancelling contracts and reordering on the same terms, there are anti-avoidance rules to deter from this.
Assets on Hire Purchase
Items acquired under a Hire Purchase will qualify if they are treated as being owned by the company making the payments if title passes when the final payment is made. Items acquired under a finance lease will not be eligible.
Capital allowances can only be claimed on all payments due to be made under the HP agreement when the asset has been brought into use.
Exclusions for all three measures
There are several cases where expenditure cannot benefit from these new allowances.
- Expenditure is incurred in the chargeable period in which the qualifying activity is permanently discontinued (i.e. the business ceases to trade)
- Cars (commercial vans are fine, but car derived vans may not be, so these will need to be checked on a case-by-case basis
- Expenditure excluded from long life asset treatment by the ‘grandfathering’ provisions
- Expenditure on the provision of plant and machinery for leasing which means based on draft legislation, landlords may not qualify as assets provided in the buildings are ‘leased’ to the tenants and where holding companies lease assets to group members. May also be an issue. HMRC will provide clarity on how they intend to apply this, but for the moment, we must take its literal meaning and err on the side of caution
- Anti avoidance where there is a change in the conduct of the nature of the trade
- Gifts of assets
The Annual Investment Allowance (‘AIA’)
The AIA will continue to be available alongside the new measures and the AIA remains at £1m to 31 December 2021. Thereafter, the AIA is expected to fall to only £200,000.
Unlike the new rules, the AIA can cover leased and secondhand assets and it would be better to claim the AIA in certain circumstances such as against special rate assets to obtain relief at 100% as opposed to 50%.
Individuals and partnerships are also entitled to the 100% annual investment allowance (AIA) on qualifying expenditure unlike the two new measures.
This is only available to Limited Companies (Partnerships and sole trades are excluded) and allows companies to claim a super deduction of 130% of qualifying plant and machinery expenditure incurred between 01 April 2021 and 31 March 2023.
If a company spends £1,000,000 on a new production line in a factory then the company can claim a deduction of £1,300,000 against taxable profits.
What is Plant and Machinery
This is not defined in the law but generally it is the apparatus’ used for carrying on the business (sometimes referred to as a ‘tool of the trade’) and regarding machinery this includes machines and the working parts of machines.
Items which can be claimed can include fire alarm systems, security systems, desks, carpets, computers equipment/servers, software (if claimed under an election) lorries, vans, tools, refrigeration, and there are many more examples.
Disposals before 31/03/2023
Disposals of assets where the Super-Deduction was claimed before 31 March 2023 will be taxable as a receipt of the trade and a factor will be applied of 1.3 to the value, for example, the uplift of 30% will be paid back.
Where the disposal occurs in a period straddling 1 April 2023, a lower factor than 1.3 will be used and is based on how many months straddle 31 March 2023 depending on a company’s year end.
Disposals after 31/03/2023
If these are disposed after 31 March 2013 (subject to the straddling period rules) then this will be treated as a receipt of the trade without the 1.3 factor applied. This is on the basis that the main rate of Corporation Tax will be 25% (see below) by this point.
Is this as generous as this it sounds?
On 3 March 2021 the Chancellor also announced that from 01 April 2023, the main rate of Corporation Tax will increase from 19% to 25% (we will be discussing this in another article along with some other measures).
Due to this tax increase and also ensuring the economy can recover from the pandemic, many businesses would seek to defer large capital expenditure to April 2023 to take advantage of the higher tax relief.
The effective rate of relief under the Super-Deduction when scrutinised is 24.7% (19% multiplied by 130%) which in effect brings forward tax relief now for businesses rather than deferring to 2023.
There are some wins for smaller businesses that may continue to pay at 19% under the small company’s rate but take advantage of the Super-Deduction.
50% first year allowance for special rate assets
This is also only available to Limited companies and allows businesses to obtain a 50% first year allowance on special rate items (mainly found as fixtures to buildings) such as:
- an electrical system (including a lighting system)
- a cold-water system
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
- a lift, an escalator or a moving walkway
- external solar shading
Currently, where the Annual Investment Allowance has been exhausted, relief is only given at 6% per annum, which can take up to 50 years to obtain 95% tax relief of a special rate item.
Where the enhanced deduction of 50% was claimed, then a balancing charge is taxed as profit in the tax return for the company.
Enhanced Capital allowances for Freeports
There are also measures to provide tax incentives for Freeports and this will be covered in an additional article.