For expenditure incurred from 1st April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments. Plant and machinery is generally defined as the following:
- Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Foundry equipment
This is not an exhaustive list. However, most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances.
Under the super-deduction, for every pound a company invests, their taxes are cut by up to 25p. This change makes the UK’s capital allowance regime more internationally competitive and will lift the net present value of our plant and machinery allowances from 30th in the OECD to 1st.
The new offer
The four significant capital allowance measures that businesses will now benefit from are as follows:
- The super-deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31st March 2023 for companies
- The 50% first-year allowance (FYA) for special rate (including long life) assets until 31st March 2023 for companies
- Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold, until 31st December 2021
- Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30th September 2026
What are capital allowances?
Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax deductible. Businesses deduct capital allowances when computing their taxable profits.
In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation but can instead deduct capital allowances.
The two main types of capital allowances are:
- Writing Down Allowances (WDAs) for plant & machinery – covering most capital equipment used in a trade
- Structures and Buildings Allowances (SBA) – covering the construction and renovation of non-residential structures and buildings
The 130% super-deduction and 50% first-year allowance are new capital allowances for investments in plant and machinery assets. Both will allow investing companies to lower their corporation tax bills.
Why is the super-deduction being introduced?
Since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and Q3 2020. Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.
Making capital allowances more generous works to stimulate business investment. As a result, these measures can promote economic growth and counter business cycles. The super-deduction will give companies a strong incentive to make additional investments, and to bring planned investments forward.
As always, if you would like any further information regarding the above, please feel free to contact our offices by email firstname.lastname@example.org.