Capital allowances are how the UK gives tax relief for expenditure on capital assets acquired for use in a business. There are several recent and proposed changes to the capital allowances regime that UK businesses should ensure they are aware of.
Who can claim capital allowances?
In general, the depreciation of assets as recognised for accounting purposes is not tax-deductible. Instead, tax relief is given under the capital allowances regime as a deduction against taxable profits. These deductions are calculated at specified rates based on the type of expenditure incurred.
Capital allowances are available to companies, partnerships and individuals if their profits are chargeable to UK corporation or income tax.
What capital allowances can I claim?
Capital allowances are typically claimed in relation to purchased plant and machinery, such as office furniture, computer equipment, company cars, and so on. The cost of these assets is added to a ‘main pool’ and a capital allowance equal to 18% of the remaining pool balance is given per year, on a reducing balance basis.
Certain types of assets that form part of a building (such as air conditioning systems, electrical systems and heating systems) are added to a ‘special rate’ pool, which attracts a 6% annual writing down allowance, again on a reducing balance basis.
An Annual Investment Allowance (AIA) is also available for the first £1 million of plant and machinery expenditure each year. This provides a 100% first year allowance, meaning full tax relief is given in the year incurred. A single AIA is shared between all companies in a group or under common control and can be allocated to different expenditure in whichever way maximises the overall tax benefit.
Recent changes to capital allowances
Super deduction and first year allowances
The March 2021 Budget introduced the super deduction, a temporary measure applicable only to companies, which offers 130% relief in the first year for ‘main pool’ plant and machinery. A new 50% first-year allowance has also been introduced for special rate expenditure, with the remaining 50% attracting relief over time at the usual 6% rate. There is no limit on the amount of expenditure that can qualify for these allowances. The assets must be new (eg not second-hand) and must be purchased between 1 April 2021 and 31 March 2023.
The main pool super deduction is therefore more advantageous than the AIA and should be claimed in priority. To the extent that the company has special rate expenditure that is not covered by the AIA, the 50% first-year allowances can be claimed on the excess.
There is a clawback mechanism for assets that are sold, so it is necessary to track the assets which are subject to a super deduction claim.
With the UK corporation tax rate set to increase from 19% to 25% on 1 April 2023, the super deduction was designed to incentivise companies to invest in plant and equipment at an earlier stage, rather than delaying investment in order to benefit from tax relief at a higher rate.
These allowances are expected to be withdrawn from 1 April 2023, the date on which the UK corporation tax rate is due to increase to 25%.
Structures and Buildings Allowances (SBA)
The Structures & Buildings Allowance (SBA) was introduced on 29 October 2018 and is available for expenditure on the construction or acquisition of a non-residential building (or a structure as broadly defined), which is not otherwise for plant and machinery allowances. A tenant may also be able to claim SBAs if they incur expenditure on new building works.
The relief was originally provided at 2% of the qualifying expenditure per year, on a straight-line basis. This rate was increased to 3% from April 2020. In order to make a claim for SBAs, the claimant must make or obtain an ‘allowance statement’, evidencing the amount of qualifying expenditure.
Disposing of a property will not give rise to a balancing allowance or charge for the seller. However, the SBAs previously claimed will be added to the disposal proceeds and so may increase the tax charged on sale. The purchaser will be entitled to claim the remaining SBAs available, assuming the relevant conditions are met.
In May 2022, the government released a policy paper that set out several options for potential reforms to the capital allowances regime and invited feedback from stakeholders. The measures that the government had been considering, and sought views on, included:
- Increasing the permanent level of the AIA. The level of AIA has fluctuated significantly over the years and was only temporarily set to the current value of £1 million.
- Increasing the rates of writing down allowances (WDAs) for main pool and special rate assets from 18% and 6% to 20% and 8%, respectively.
- Introducing general first-year allowances (FYAs) for qualifying expenditure on plant and machinery.
- Introducing a permanent super deduction – allowing businesses to claim a deduction that exceeds the original cost of the asset.
- Introducing permanent full expensing – allowing businesses to claim full relief for expenditure in the year incurred.
The turbulence within the UK government during September and October 2022 saw the announcement and subsequent abolition of various tax measures, including several relevant to the capital allowances regime.
With the announcement on 24 October that Rishi Sunak would succeed Liz Truss as Prime Minister, it remains to be seen what further amendments will be made to the capital allowances regime – and whether they will resemble the options reviewed as part of the May consultation. We will provide updates as and when further developments arise.
If you have any queries on the matters discussed in this article, please get in touch with your usual Saffery contact, or speak to Rob Harness.