Capital Allowances and the Super Deduction
Capital Allowances are HMRC incentives to help you pay less tax on the assets you buy. There are quite a few restrictions around them, but now is the time to take advantage if you can, as the most generous are coming to an end!
When a business incurs costs, such as salary payments or stationary procurement, it can usually fully deduct them as expenses from its taxable profits, reducing the tax due. However, when it buys assets for operational purposes, capital allowances come into play, and things are not quite so straightforward.
Let’s take a look at the main capital allowance tax reliefs.
The Super Deduction
The super deduction is the most generous of the current capital allowances. It gives you 130% first-year relief on qualifying plant and machinery – significantly better than even a fully deductible expense. In fact, it saves you up to £247 in corporation tax for every £1,000 you invest.
There is a catch, though: it is time-limited and expires at the end of March 2023.
It is time-limited because of its level. It was introduced in April 2021 as part of the Government’s economic response to the pandemic, to encourage businesses to invest and boost productivity.
At the time, already low levels of business investment had dropped between Q3 2019 and Q3 2020, during some of the darkest days of the pandemic.
If you have the cash to do so, the Super Deduction could make it an excellent time to invest in qualifying assets.
For example: If a business were to invest £50,000 in plant and machinery which qualified for the super deduction, it would be treated as £65,000 expenditure in its capital allowances computation (130% of £50,000).
This would lead to a corporation tax saving of £12,350 as opposed to £9,500 if the deduction had been 100%.
Points to note about the Super Deduction:
- Only a limited company can benefit from the Super Deduction and it can only be claimed on new plant and machinery, as opposed to second-hand assets.
- In addition, the purchase must be for direct use within your business, not for leasing or renting out to customers.
There is no full list available of plant and machinery that qualifies, but HMRC considers most tangible assets that would normally qualify for the main rate pool, below, to be acceptable for the Super Deduction.
This would include computer equipment; office furniture; vans, tractors and lorries; ladders, cranes and drills; and electric vehicle charge points, as examples. If you’re unsure, please ask! Be aware though that one notable exception is cars, even if they are solely for business use.
It’s important to plan ahead if you want to take advantage of the Super Deduction, particularly in relation to the timing of your purchase and the end of your accounting year. With only a matter of weeks remaining until the Super Deduction is due to expire, if you’d like to take advantage, we’d advise you to start your planning process as soon as possible.
There are other capital allowances available, even if you miss the deadline for the super deduction, or your purchases don’t qualify.
Annual Investment Allowance
The Annual Investment Allowance (AIA) is another capital allowance tax relief which allows you to gain first year relief on plant and machinery purchases in full.
In principle, the AIA is a permanent relief. However, while it normally has a £200,000 qualifying expenditure cap, this has been temporarily boosted to £1 million. The expiry date of the temporary boost, like that of the Super Deduction, is 31st March 2023.
The general kinds of qualifying purchases are the same as for the Super Deduction but, significantly, the AIA is available for second-hand purchases and assets purchased for leasing.
The rate of relief is 100%, which is generous compared to most capital allowances, but not as good as the Super Deduction. If you qualified for both, it would be better to choose the Super Deduction over the AIA. As the Super Deduction is only available to limited companies, the AIA is the alternative for sole traders or partnerships.
If you’d like to discuss your options, please get in touch!
Other Capital Allowances
If you’re unable to claim the Super Deduction or AIA, you should still be able to claim what are called Writing-down Allowances.
The disadvantage of these is that you are unable to get the full tax benefit against the first year, which is generally good for cashflow. Instead, you deduct a percentage of the value of the asset from your taxable profits every year.
The value is normally deemed as what you paid for the asset originally, unless it was a gift or you owned it before it had a business use. In these cases, you go with its current market value.
There are two rates which apply to writing down allowances. These are an 18% main rate and a 6% special rate. You group assets into pools based upon these rates. Most things go into the more generous main rate pool, but a select few must go into the special rate pool. These include: items with a long life, integral parts of a building (this has a specific meaning which includes lifts, air conditioning systems and external solar shading among other things), thermal insulation of buildings and cars with high CO2 emissions.
There is a bit more to the detail of working out writing down allowances, but we won’t go into that here as it gets quite complex! The summary is that this is a less generous relief for when the Super Deduction or AIA is not available.
Can you beat the deadlines?
With 31st March rapidly approaching, you need to act quickly to benefit from the Super Deduction or AIA.
If your accounting period straddles the deadline, the enhanced tax benefits will be applied pro rata, based on the timing of your purchase within your accounting period as well as the deadline. This really does make it essential to plan well to ensure you choose the correct relief and get your budgets right.
We’ve been asked about the likelihood of these more generous capital allowances being extended beyond March 2023.
The AIA in its current guise has already been extended and, given it was introduced as a measure to balance a challenging economic outlook, there’s every justification for further extension, but no news as yet.
Additionally, the Institute of Directors is calling for an extension, citing their own research, which shows that the Super Deduction has had ‘a positive and measurable impact’ on business investment.
We’ll know more after the Budget on the 15th March, and will of course keep you informed of any developments in the meantime.
If you’re considering investments in your business to take advantage of any of the above, please get in touch to discuss them. It’s vital to plan your purchase carefully, and we can help you ensure you get full advantage where possible.
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