With potentially the full amount being available immediately if sufficient use can be made of the Annual Investment Allowance (AIA), which is currently set at £1 million.
A typical new build car dealership in the UK may have plant of around 43% of the build cost. This varies by design, brand and the particulars of individual procurement, including the quantum of direct works but is useful for illustrative purposes.
The total allowances would typically fall in such an example to be split 35% main pool and 65% special rate pool. Again this is just indicative but is useful to illustrate the cash effects of the recent changes.
Based on these rates and splits the example dealership would have £376,350 of main pool allowances and £698,750 in special rate pool allowances.
The new temporary reduction of 130% would be applied to the main pool given a £489,125 reduction. The £698,750 would benefit from a 50% first year deduction with the balance being written down at 6% per year. Therefore, £349,375 should be written off under the 50% rate and £20,962 under the 6% rate.
The balance of the special rate pool £328,412, would be carried forward into future years and written down at a rate of 6% per annum.
Even ignoring the AIA in its entirety there should be an immediate cash benefit of £163,297 if sufficient tax is paid using this illustrative example. Though in reality many dealers will be able to obtain the full cash benefit, £239,110 in such an example by appropriate use of the AIA.
These incentives are therefore potentially valuable but given the current business environment care should still be taken before accelerating capital expenditure. In particular to ensure that the enhance reliefs are applicable as there are exclusions as covered below.
The above is also indicative only of a new build. The typical rates will be different for refurbishments, extensions etc. In considering the enhanced reliefs, it is important to consider carefully the typical level of allowances at the outset if there is debate on bring forward capital expenditures.
The headline-grabbing super-deduction allows companies to deduct 130% of a qualifying asset’s cost from pre-tax profits without limit; a 24.7p reduction in tax liability for each £1 invested.
To qualify for the super-deduction, expenditure must be incurred:
- on or after 1 April 2021 but before 1 April 2023 (contracts entered into on or before 3 March 2021 cannot qualify), and;
- on new and unused, not second-hand, plant and machinery.
Specifically excluded from the deduction is expenditure on
- long-life assets, and;
- the provision of plant and machinery for leasing.
The ‘SR allowance’ allows companies to deduct 50% of expenditure on special rate assets from pre-tax profits without limit; a 9.5p reduction in tax liability for each £1 invested.
Similarly to the super-deduction, expenditure must be incurred on or after 1 April 2021 but before 1 April 2023 on new plant and machinery other than cars, long-life assets, and leased plant and machinery.
The super-deduction should apply to ‘main pool’ expenditure such as car lifts, tools, equipment and other items used in the business, as well as alterations to buildings to install other plant and machinery.
The super-deduction compares favourably to the 100% deduction of up to £1m expenditure under the Annual Investment Allowance (‘AIA’), returning 19p for each £1 invested.
This may encourage lower value items to be capitalised (it now potentially being worth the administrative cost to do so), and careful reflection on whether other expenditure could be capitalised (e.g. staff costs installing plant).
With the main rate of corporation tax scheduled to increase to 25% from 1 April 2023, there may be limited benefit in bringing forward capital expenditure from that period, depending on the level of expenditure and the AIA limit at the time.
Further, the Treasury will recover some of the tax benefit given by taxing balancing charges on end of life assets at the increased 25% rate.
The SR Allowance is applicable in the main to integral features of a building such as HVAC systems and electrical and power systems.
The SR allowance compares favourably to the 6% special rate which might otherwise apply, although with the AIA limit currently at £1m it appears of greatest benefit to those companies spending more than £1m on special rate assets. The £1m AIA limit is temporary and expected to return to its previous level of £200k after 31 December 2021.
Planning Capital Expenditure
Given the varying rates of relief for different expenditure, and that some substantial costs remain outside the scope of capital allowances (including land, buildings, doors/shutters and mains water systems), it can be seen that costs associated with, for example, a workshop extension, could quickly have complex tax treatment. Careful planning should therefore be undertaken if the tax position is to be budgeted for.
An extension of loss carry back was also announced so that losses made in 2020/21 and/or 2021/22 will be available to offset taxable profits for the three prior years on a ‘last in first out’ basis. The extension applies to a maximum of £2m for each company, corporate group or unincorporated business per loss-making year, and each company within a group is limited to a cap of £200k per loss-making year. The ability to carry back to the previous 12 months remains unlimited and capital allowances can generate losses.
The cashflow benefit of refunding tax paid at 19% now must be weighed against carrying the loss forward into years with a higher main rate of tax of 25%.
The next step
If you would like to discuss a potential capital project and obtain a guide to the likely level of relief available within the project please contact Clive Gawthorpe on email@example.com for specific advice to your circumstances.