Tax Tuesday is looking back at the Budget this week with a reminder about the new super-deduction and the new special rate capital allowance reliefs. We all need to keep them in mind because they are temporary (and the next 23 months are liable to pass in a flash!).
The new initiatives announced are clearly intended to increase business investment, assist post-pandemic economic recovery and give a boost to the UK’s productivity levels.
So, are you ready to make the most of these ‘tax breaks’ whilst they are available?
Here’s a recap on the features and benefits (including a note of the inevitable exceptions).
Businesses can now benefit from the following significant capital allowance measures:
- The “super-deduction” allowance, which provides 130% first-year relief on new assets which qualify as “main rate” plant and machinery (i.e. on expenditure which would usually qualify for 18% main pool annual relief). This applies to most things but please note, they must be new!
- Alongside the above, the new “special rate allowance” which provides a 50% first-year allowance (FYA) for new assets which are long life assets, or integral features in buildings (i.e. expenditure which would usually qualify for 6% special pool annual relief). Again, these assets must be new!
- Aside from the new items above, be aware that there has been a further one-year extension (to 31 December 2021) to the £1m Annual Investment Allowance (AIA) which provides 100% relief for plant and machinery expenditure, generally, up to its £1 million annual cap. This covers plant and machinery of all types, second hand or otherwise (and is likely, therefore, to be used in priority to the “special rate allowance” immediately above).
(A further announcement made was in relation to Enhanced Capital Allowances (ECA+) available for expenditure incurred in Freeport tax sites until 30 September 2026. Read our Freeports blog)
Factors for consideration
We see a few important considerations to note:
- The super-deduction and special rate allowances are only available to companies subject to Corporation Tax. It is not relevant to unincorporated businesses. (See our website for Corporate Tax advisory services)
- Please excuse the repetition (for emphasis) but these new allowances are only available for expenditure under contracts entered into between 1 April 2021 (already more than a month behind us) and 31 March 2023 (AIA is scheduled until 31 December 2021).
- There is no cap on the amount of capital expenditure that can qualify for the super deductions and special rate allowances.
- More repetition (for even more emphasis!): The two new reliefs are only for new, unused plant and machinery and not second-hand assets.
- Exclusions apply, however; assets used for leasing (so integral features or plant and machinery fixtures installed in a building that is let will suffer the “leasing” exclusion, unfortunately, as will machinery purchased by hire businesses); and cars (which have their own capital allowance rates and rules).
These super-deductions may significantly increase the total deductions a taxpaying business can claim, reducing the tax it pays on profits and potentially even creating losses in a chargeable period.
Making the most of super-deductions
On the basis that your company will benefit from relief on a 30% enhancement under the super-deductions, please remember it is not a permanent concession. To make the most of this giveaway it must be worth carefully considering the timing of any contractual arrangements and company capex plans, generally.
The Corporation Tax rate is set to rise from 19% to 25% in 2023 on profits over £250,000 (with an effective 26.5% “marginal rate” on profits from £50,000 to £250,000). Capital allowances will, therefore, become increasingly important as the incentive payback begins. There will also be some planning required to work out whether businesses carry back losses created by allowances or choose to carry forward to set against the 25% tax rates in later years.
How can we help?
For further information or to discuss your individual business needs in more detail, please do not hesitate to get in touch with your relationship principal, or with Chris Barrington, Tax Partner.