In an unexpected offer of generosity, as part of the Chancellor’s spring budget, temporary ‘super’ capital allowances were announced with a view to kick start the post covid recovery. Here we set out the requirements for making a claim and the benefit on offer.
What has changed
The introduction of two temporary first year allowances (FYAs) available on new capital expenditure incurred from the 1 April 2021 to 31 March 2023 for contracts entered into after 3 March 2021, namely:
|Capital Allowances||Rate of Relief||Examples|
|Super-deductions (SDs)||130% for main plant and machinery pool expenditure||Firefighting systems
Furniture, fittings & equipment
|Special Rate (SR) Allowances||50% for special rate expenditure||
Lighting & power
Heating, ventilation & cooling systems
Benefit of claiming
In cash terms, claiming the SD provides a 24.7% cash saving, so, for every £100 spent, the net tax cost is £75.30. If the tax relief is rolled forwards and claimed when the corporation tax rate is increased to 25%, that cost saving increases to 32.5% or a net tax cost of £67.50.
Benefit example: Based on year 1 benefit for a company spending £10m on qualifying main plant and machinery assets:
|Previous (Before 1 April 2021)||With Super-Deduction (After 1 April 2021)|
|Deducts: Using the Annual Investment Allowance @ £1m||Deducts: £10m x super-deduction of 130% = £13m|
|Deducts: (£10m – £1m = £9m)
18% Writing Down Allowance x £9m = £1.62m
|Tax Saving: £2.62m @ CT rate of 19%
|Tax Saving: £13m @ CT rate of 19%
Restrictions & disposals
Applies to corporate tax-payers only, so individuals and partnerships miss out, but can still claim the annual investment allowance of £1m up to the end of 2021. The qualifying expenditure must be new and not second-hand, so only acquisitions of unused buildings can qualify.
Certain ‘leased’ plant and machinery is also restricted. In essence, if you lease an asset or lease space in a property, those assets for which the ‘control’ has been passed, will be excluded. Where the landlord can demonstrate that they have retained control of the qualifying plant and machinery, such as for common areas to a multi let office, where the tenant has only a ‘right’ of access, then a claim can still be made.
There is also the potential for some clawback of the additional 30% tax relief for SDs, if the asset is sold within the period in which the temporary relief ends.
The claiming of individual equipment purchases is straight forward enough, albeit there will be an increase in administration to record those claimed assets. The complexity applies where those potential qualifying assets relate to a wider building project and particularly where the capital project has a mix of landlord and tenant controlled assets.
In this scenario, applying an area calculation method will lead to under claiming and so a detailed valuation exercise will need to be undertaken by a capital allowances specialist, to fully benefit from these generous temporary tax reliefs.