As part of the budget this month, the government announced new capital allowances in the form of a “super-deduction” and 50% first year allowances in an attempt to increase investment over the next two years.
What capital allowances are currently available?
Capital allowances act to replace accounting depreciation with a set deduction for qualifying assets. The primary ways in which relief is obtained are:
- Writing down allowances on qualifying plant and machinery, either at 18% reducing balance or 6% reducing balance, depending on the type of asset acquired and whether these assets fall within the Main Pool or the Special Rate Pool.
- Annual Investment Allowance (AIA), which allows 100% relief for qualifying assets up to a threshold amount per annum, currently £1m until 31 December 2021.
Other reliefs are available, particularly regarding non-residential buildings and certain energy-efficient cars and equipment.
What is qualifying plant and machinery?
Qualifying plant and machinery is broadly equipment used within a business to carry out a qualifying activity.
For the majority of plant and machinery, relief is available at the Main Pool rate of 18% reducing balance. These assets often include:
- Computer equipment
- Tools
- Machinery
- Furniture
- Vans
- Certain low emission cars.
For some plant and machinery, relief is only available at the rate applicable to the Special Rate Pool of 6%. This typically consists of:
- Integral features
- Cars with higher emissions
- Long life assets with an expected useful life of 25 years or more.
Integral features are those that are integral to a building and include electrical and lighting systems, heating systems, cold water systems, and lifts.
What new capital allowances are available?
The “super-deduction” will allow companies to offset 130% of the expenditure incurred on plant and machinery that would normally qualify for main pool rate allowances at 18% against taxable profits.
Companies will also be able to claim a new first year allowance equal to 50% of the expenditure incurred on plant and machinery that would normally qualify for special rate allowances at 6%.
Relief will continue to be available in the usual way against the remaining 50%, either at 6% or by offsetting with any remaining AIA.
Both new allowances will be available on qualifying expenditure incurred from 1 April 2021 until 31 March 2023 and will only be available to companies within the charge to UK corporation tax.
There is no limit on the level of expenditure that can qualify for either the super-deduction or the 50% first year allowances.
Special rules apply where an asset on which the new allowances have been claimed is sold. In both cases, the disposal proceeds will be treated as balancing charges and taxable in the year of disposal.
If a company disposes of an asset after 31 March 2023 on which it has previously claimed the super-deduction, the proceeds will be taxable in full in the year of disposal.
If this disposal occurs before 1 April 2023, then the disposal proceeds are multiplied by a factor of 1.3; however, where a period straddles 1 April 2023, a reduced factor is applied, on a time apportioned basis.
If a company disposes of an asset on which it had claimed the 50% first year allowances, the balancing charge taxable in the period of disposal would most likely be 50% of the disposal proceeds.
