Depreciation of fixed assets charged in the accounts is not allowable in computing taxable profits. Instead, the UK government introduced capital allowances which is a form of tax relief that allows businesses which pay tax in the UK to deduct from their taxable profit (before calculating their tax liability), the value of their qualifying capital expenditure on assets such as equipment or buildings.
In a recent article highlighting the benefit of the super-deduction scheme, thoughts on future capital allowances changes were shared. This included the assumption that it appears as though the government has no intention to extend the super-deduction scheme beyond its planned end date. This is on the basis that since the 130% first year super-deduction effectively provides almost 25p tax cash saving for every £1 spent during the current 19% CT rate regime, the super-deduction is designed to incentivise businesses not to defer their capital expenditure until when the 25% Corporation Tax rate kicks in as expected from 1 April 2023.
Also mentioned in that recent article was that if the super-deduction scheme is not extended, it would not be surprising to see that another equally beneficial measure will be announced. It is therefore interesting to see the array of reforms to the capital expenditure tax relief landscape, which the government is considering as featured in the Spring Statement 2022.
Reforms being considered by the Chancellor
The Chancellor of the Exchequer, The RT Hon Rishi Sunak MP on 23 March 2022 delivered his Spring Statement 2022 speech at the house of commons. Based on his speech, it is expected that a number of reforms to better support business investment in the UK would be coming into effect.
The full Spring Statement 2022 document does not contain details of any confirmed concrete changes. However, some of the reforms the government is considering include a very ambitious 100% capital expenditure deduction from taxable profit, otherwise known as full expensing.
Full expensing
In modern British history, this is considered very generous and simplified. This could potentially mean that when a business spends a £10m in acquiring any piece of plant or apparatus for carrying on their business activity for example, they may be entitled to deduct the £10m immediately in full from their taxable profit in that year. Assuming a 25% Corporation Tax rate, the immediate tax cash saving benefit would equate to £2.5m. This is far more generous than the immediate tax benefit expected in the current tax relief landscape (excluding the temporary super-deduction).
The super-deduction scheme is a form of capital allowances tax relief. The super-deduction scheme introduced in Finance Bill 2021 to amend Part 2 Capital Allowances Act 2001, is a two-year temporary first year allowances (FYA) for certain qualifying capital assets in the form of plant and machinery. The scheme was announced on 03 March 2021 and is only available to businesses within the charge to corporation tax.
Other changes being considered
There are other changes the government is also considering which may not be as generous, and have the potential to further heighten the complexity of the capital allowances scheme. These other changes are as follows:
- Annual investment allowances (AIA): The government is considering increasing the AIA permanent limit from £200,000 to £500,000. AIA allows a full deduction up to a certain annual limit in respect of the costs incurred on certain qualifying capital assets in the form of plant and machinery, during the year the spend was incurred. This is currently set at £1m temporarily until 31 March 2023.
- Writing down allowances (WDA): The main and special deduction rates of WDA which is more or less the default avenue of getting tax relief on plant and machinery allowances, could also be increased from 18% and 6% respectively, to 20% and 8%. The WDA allows tax deduction at a reducing balance basis. The main pool (MP) rate is available in respect of assets such as business equipment and furniture; whilst the special rate pool (SRP) is available in respect of assets such as heating, ventilation, and air-conditioning systems.
- New first-year allowances scheme: The government is also considering a new first-year allowances scheme that will see for example 40% and 13% of immediate deduction available on main and special rate pool qualifying assets respectively. The balance of say 60% and 87% will then be available in the default way through the WDA. irst-year allowances allow a full deduction of the costs incurred on certain qualifying capital assets in the form of plant and machinery, during the (first) year the spend was incurred. Hence it is called “first year” allowances.
- Another first-year allowances variation: There is yet another variation of the first-year allowances which the government is also considering. This will be in addition to claiming the default WDA. For instance, in addition to eligibility to claim WDA on £1m of qualifying capital expenditure, an additional 20% of allowances, that is £200,000 may be claimable in the first year. That means that an overall allowances of £1.2m or £300,000 of tax cash saving benefit (assuming 25% Corporation Tax rate) will be claimable, albeit over a number of years. This has some similarities to the super-deduction scheme; however, the 130% super-deduction is designed to be claimable in full immediately.
How we can help
Our capital allowances team of qualified specialists with diverse experience and multidisciplinary construction and financial skills, leverage on their expertise to maximise cash saving benefits for businesses who incur capital expenditure.
We provide a whole development lifecycle capital allowances advice from planning to design, construction, occupation and subsequent disposal or sale. This includes property sale and purchase transaction advise to support either the vendor to retain their capital allowances, or for the buyer to benefit from capital allowances on the purchase price paid.
What are the next steps?
Capital allowances can be claimed not only by companies, but also partnerships, individuals and overseas investors which carry out qualifying business activities such as a trade, property business, furnished holiday let, etc.
Are you planning to, or have you already incurred any commercial building or large-scale industrial and engineering plant related capital expenditure which may fall under any of the following categories?
- New construction
- Fit-out works
- Refurbishment works
- Buying buildings
Please let us know as we can help you unlock and maximise cash tax savings and improve your business cash flow.
