The Coronavirus pandemic has heightened the importance of cash retention for companies and this has been reflected in some of the main changes announced by the Chancellor in his recent Budget, which we explore further in this article.
Capital allowances – new temporary super deductions
One of the main Budget announcements was the introduction of new enhanced capital allowances on capital expenditure. Companies will benefit from increased tax relief where they invest in new qualifying plant and machinery for a temporary period (from 1 April 2021 to 31 March 2023).
Where capital expenditure is properly incurred by companies on new qualifying plant and machinery during the two-year period, the following new enhanced capital allowances will be available:
- A new ‘super-deduction’ where a capital allowance of 130% will be available on the acquisition of new qualifying plant & machinery falling within either the main asset pool or single asset pools. This would include most qualifying plant and machinery not fixed to a building.
- A new special rate, ‘SR allowance’, where a capital allowance of 50% will be available on the acquisition of new plant & machinery falling within special rate asset pools. This would mainly include qualifying integral features fixed to a building, such as electrical systems, air-conditioning and water systems.
It is important to note that these new enhanced capital allowances will only be available to companies and will not apply to unincorporated businesses, partnerships or LLPs.
The rules determining the date when capital expenditure is incurred for capital allowance purposes can be complex and so advice must be sought in determining whether the timing of a company’s capital spend will fall within the two-year period.
There are some specific rules that prevent enhanced allowances being available where contracts were entered into before 3 March 2021 (Budget date) or where there are contrived, abnormal or uncommercial arrangements in place to claim the enhanced allowances.
There are provisions to restrict the super-deduction where the capital expenditure is incurred in an accounting period straddling 31 March 2023 and to claw back enhanced allowances previously claimed when qualifying assets are disposed of via a balancing charge.
This latter point is a major change to the capital allowance regime, as balancing charges would normally only apply to the disposal of an asset in the main asset pool or special rate asset pools where either the sale proceeds exceed the overall tax written down value in the pool in question or there is a cessation of the qualifying activity. However, under these new rules, balancing charges will arise on every future disposal of assets where either the super-deduction or the SR allowance has been claimed. If the balancing charge relates to a super-deduction asset, and that that asset is disposed in an accounting period beginning before 1 April 2023, then the balancing charge is enhanced.
Given this, it is important that companies retain accurate records of all amounts claimed under these new enhanced capital allowances. Where there are any future disposals of fixed assets out of any capital allowance pools, these records will be required to enable a company to identify whether or not the super-deduction or SR allowance were claimed on the assets being disposed in order to quantify any balancing charge.
In addition, there are a number of asset types that are specifically excluded from the new enhanced capital allowances, including second hand asset, assets for the purposes of leasing and long-life assets.
The Annual Investment Allowance
Given the post-Budget focus in the media on these new enhanced allowances (and especially the super-deduction), the changes to the Annual Investment Allowance (AIA) could easily have been missed.
The AIA has been around since 2008 and so is long established. It provides 100% capital allowances on qualifying plant and machinery up to a current annual limit. The Budget confirmed an earlier announcement that the current annual limit of £1 million would be extended to 31 December 2021 (after which, subject to any further extension, will reduce to £200,000).
The AIA remains important as:
- Second hand assets, assets for the purposes of leasing and long-life assets, which do not qualify for the new enhanced capital allowances, can still potentially be eligible for 100% capital allowances under the AIA (compared to otherwise being subject to annual reducing balance allowances at either 6% or 18%).
- Integral features can be eligible for higher capital allowances under the AIA (at 100%) compared to the SR allowance (at 50%).
The AIA is, therefore, still a valuable tool in enabling companies to maximise their overall capital allowances, which can result in substantial cash flow savings.
As an aside, it should be noted that new expenditure on cars will not qualify for either the new enhanced capital allowances or the AIA.
Carry back of trade losses
If a company makes a trade loss in an accounting period ending during the two-year period from 1 April 2020 to 31 March 2022, then these trade losses can be carried back against the company’s taxable profits of the previous three years (rather than the usual one year), with losses carried back against later years first.
It is important to note that these carry back rules only apply to trade losses. They will not apply to, say, losses from a property investment business.
From a practical perspective, these new rules look at the two-year period, in which trade losses are incurred, as two separate years, ie those trade losses incurred in an accounting period ended during the period from 1 April 2020 to 31 March 2021 (referred to as ‘the 2020 Claim’ in the draft legislation) and those trade losses incurred in an accounting period ending during the period from 1 April 2021 to 31 March 2022 (‘the 2021 Claim’).
Whilst these rules apply to all trade losses, these trade losses can be increased by capital allowances relating to qualifying plant and machinery used in the trade. In particular, the 2021 Claim could benefit from the new enhanced capital allowances referred to above.
Whilst the trade losses that can be carried carry back one year will remain uncapped, those losses carried back the two extra years are subject to an annual restriction of £2 million, applied on a group basis. This £2 million cap is applied to the 2020 and 2021 Claims separately, so it is possible for up to £4 million of trade losses to be carried back an extra two years. This could result in a cash repayment of up to £760,000 (at the 19% current rate of corporation tax).
Potentially, trade losses could instead be carried forward and offset against taxable profits at the higher rates of corporation tax of up to 25% (due to be introduced after April 2023). However, in many cases, it will be the case that the benefit of an early receipt of cash is to be preferred to potential future tax savings at that higher corporation tax rate.
The Chancellor’s announcements in the Budget were been aimed at assisting companies’ cashflow in the short-term by increasing capital allowances and extending the carry back of trade losses against profits of the previous three years.
Whilst a lot of media coverage has focused on the new super-deduction allowance of 130%, the cashflow benefits available to companies under long-established AIA should not be overlooked.
If you require any more information in respect of the above, please speak to your usual Saffery Champness contact.
This article provides a general summary of the cash flow benefits for companies from the 2021 Budget and is not be a substitute for tax advice. This summary is based upon the draft legislation which could change prior to becoming statute.