In his Budget on 3rd March 2021, chancellor of the exchequer Rishi Sunak announced the “biggest tax cut in British history”. He was referring to the introduction of temporary first-year capital allowances (FYAs) aimed at giving a significant boost to the UK’s economic recovery from the Covid-19 pandemic.
What are First-Year Allowances?
The basic capital allowance available to all businesses is the ‘main pool’ writing down allowance (WDA). This allows you to deduct 18% of the cost of the asset each year over the asset’s lifetime until you stop using it.
A first- year allowance (FYA) permits businesses to deduct from their tax liabilities a percentage of the cost of qualifying capital expenditures made during the year in which the equipment was purchased.
The chancellor’s new temporary FYAs provide businesses investing in qualifying plant and machinery with bigger tax deductions in the tax year of purchase than would normally be available.
The new temporary FYAs are:
• ‘Super-deduction’. This allows a business to deduct from its taxable profit 130% of the value of qualifying plant and machinery that would normally qualify for the 18% per annum reducing balance ‘main pool’ rate of writing down allowances.
• ‘Special Rate’ or ‘SR’ allowance. This is a 50% first-year allowance for capital expenditure on plant and machinery qualifying for the ‘special rate pool’. This typically applies to integral features in a building or structure (such as heating systems, lifts or lighting) and assets with an economic life in excess of 25 years. The SR allowance is normally 6% per year.
What about other allowances?
The new temporary FYAs will be available in addition to the ongoing Annual Investment Allowance (AIA) which already gives 100% relief for costs of qualifying plant and machinery up to a certain value in the tax year of purchase. The value limit for AIA is set at £1m per business for 2021.
All business types, including sole traders, partnerships and limited companies, qualify for AIA whereas only limited companies can claim the new super-deduction and SR allowances.
What are the main conditions for the new allowances?
Type of purchase: The investment must be on new plant and machinery. It does not apply to used or second-hand equipment
Eligible businesses: The FYAs are only available to companies subject to corporation tax and do not apply to sole traders, partnerships, LLPs or unincorporated businesses.
Timescales: The FYAs are also only available where the contract for the purchase was signed after 3rd March 2021 and the expenditure incurred between 1st April 2021 and 31st March 2023. If a contract and expenditure fall outside these parameters the FYAs will not be available and the expenditure would qualify at the normal rates for the main pool (18%) or special rate pool (6%).
Exclusions: As the super-deduction and SR allowances are first year (i.e. not ‘main pool’) allowances there are some specific exclusions, including any expenditure on cars and on the provision of plant and machinery acquired for leasing (see ‘What about plant-hire?’).
What about plant-hire?
If plant or machinery is to be leased, the FYAs will not be available on its purchase and the expenditure would usually qualify at the normal main pool or special rate pool rates.
HM Revenue & Customs (HMRC) makes no distinction between ‘leasing’ and ‘hiring’ but there is a specific exception relating to the provision of services that involve the use of an asset.
HMRC considers that hire plant provided with an operator is a ‘service’, and not mere ‘hire’. This means that the purchase of such plant is not disqualified from FYA by the leasing exclusion.
Example 1 Acme Tower Cranes purchases a fleet of cranes which it hires to GB Construction for use on a major project. Assuming the cranes are new and their purchase was within the relevant time period, Acme Tower Cranes can claim the 130% super-deduction on its investment.
This is because tower cranes are hired out with a full-time operator and Acme is providing a service, not leasing the equipment, to GB Construction.
Example 2 A1 Tool Hire buys a fleet of site dumpers that it distributes across its depot network for hire to customers on a day-rate. The purchase does not qualify for the FYA super-deduction. This is because the equipment is not supplied with an operator and A1 is considered to hiring or leasing, not providing a service that involves use of the asset.
How much tax relief can companies obtain?
The table below details the effective first-year tax relief for a company investing in expenditure eligible for the super deduction and SR allowances compared to the usual 18% and 6% writing down allowance for investment in main pool plant and machinery and special rate pool assets.
The SR allowance gives relief at 50% of the qualifying cost in the first year with the balance going into the normal special rate pool to be written down at the usual 6% rate in future years.
Example 1 Company A spends £100,000 on a new telehandler. It placed the order on 5th March 2021 and will make payments within the period 1st April 2021 to 31st March 2023. The expenditure qualifies for the 130% super deduction.
Tax relief available for the asset in the year of purchase: £100,000 x 130% = £130,000
First year tax relief at the current 19% rate of corporation tax: £130,000 x 19% = £24,700.
Example 2 Company B buys the same type of telehandler at the same price of £100,000 but before 3rd March 2021.
The contract is outside the FYA period and so tax relief in the year of purchase is at the normal ‘main pool’ rate of 18%.
Tax relief for the asset is in the year of purchase: £100,000 x18% = £18,000
Tax relief at the current 19% main rate of corporation tax: £18,000 x 19% = £3,420
The tax relief for the balance of the remaining £82,000 (purchase price minus £18,000 first- year tax relief) will be available as the writing down allowances are claimed on a reducing balance basis.
What if I sell an asset that qualified for FYAs?
Companies must track all super-deduction and SR allowance assets individually until they are disposed of.
For any expenditure that qualifies for FYAs, the disposal value will usually be determined in the same way when the asset is sold. However, the amounts incurred on plant claimed as either ‘super-deduction’ or ‘SR allowance’ will be recognised as a ‘balancing charge’.
A balancing charge is the clawback of tax allowances that have been given in respect of an asset at the time of sale. For example:
• A site dumper is originally purchased for £30,000 and written down for tax purposes over a period of four years to £10,000. If the dumper truck were then sold to a third party for £15,000 there would be a balancing charge payable to HMRC of £5,000 (sales proceeds of £15,000 less tax written-down value of £10,000).
Note also that the main corporation tax rate will increase from 19% to 25% from 1st April 2023. If a disposal of plant and machinery occurs after 1st April 2023, then the charge will be subject to this higher rate of corporation tax, whereas the original relief will have been calculated against the current 19% corporation tax rate.
Is there an annual limit on the amount that can be invested?
Unlike the Annual Investment Allowance (AIA) for which there is an annual limit that applies to a business or group of companies (currently £1m in the calendar year 1st January 2021 to 31st December 2021), there is no limit or cap on the amount of capital investment that can qualify for either the super-deduction or the SR allowance.
With the main rate of corporation tax due to increase from 19% to 25% from 1st April 2023, deciding on the most tax-efficient mix of capital allowance claims for the chargeable periods 2021/22, 2022/23 (and possibly 2020/21) may be complex.
Companies need to consider the availability of the FYAs and current AIAs carefully when making and planning investment decisions to balance current cashflow needs against the wish to get the most tax relief.
Such considerations are likely to require careful forecasting of future profits, losses and capital investments to ensure that your business makes the right decisions.
About the Author
Steve Watts is a tax partner at BDO and heads up the capital allowances team. He is a chartered surveyor and member of the Association of Tax Technicians and has been specialising in capital allowances for over 25 years. Steve advises businesses on capital allowances issues across all sectors particularly in respect of the complex area of capital allowances associated with the acquisition, construction and fitting out of property.
For more information contact bdo.co.uk