Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances.
Capital allowances allow taxpayers to write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax-deductible.
The two main types of capital allowances are:
- Writing Down Allowances (WDAs) for plant & machinery - covering most capital equipment used in a trade; and
- Structures and Buildings Allowances (SBA) - covering the construction and renovation of non-residential structures and buildings.
The 130% super-deduction and 50% first-year allowance are generous new capital allowances for investments in plant and machinery assets.
The Super Deduction
This is only available to companies for expenditure incurred on NEW qualifying assets from 1 April 2021 until the end of March 2023. It gives a 130% first-year deduction on qualifying main rate plant and machinery investments.
There is also a 50% first-year allowance (FYA) for special rate (including long life) assets.
- A company incurring £1m of qualifying expenditure decides to claim the super-deduction.
- Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits.
- Deducting £1.3m from taxable profits will save the company up to 19% of that – or
- £247,000 – on its corporation tax bill.
Example two (Comparison with previous system)
- A company spends £10m on qualifying assets
- Deducts £1m using the AIA in year 1, leaving £9m
- Deducts £1.62m using WDAs at 18%
- Deductions total £2.62m – and a tax saving of 19% x £2.62m = £497,800
- The same company spends £10m on qualifying assets
- Deducts £13m using the superdeduction in year 1
- Receives a tax saving of 19% x £13m = £2.47m
A saving of almost £2m!
Things to watch out for
- Certain expenditure (under normal capital allowance rules) will be excluded.
- Used and second-hand assets.
- Expenditure on contracts entered into prior to 3 March 2021, even if expenditure is incurred after 1 April 2021.
- Plant and machinery expenditure incurred under a Hire Purchase or similar contract must meet additional conditions to qualify.
- The rate of the super-deduction will require apportioning if an accounting period straddles 1 April 2023. The rate should be apportioned based on days falling prior to 1 April 2023 over the total days in the accounting period.
- New disposal rules will apply to assets that benefit from these allowances.
- Disposal receipts will be treated as balancing charges (taxable profits), instead of being taken to pools.
- If only a proportion of the cost benefited from the claim, the same proportion will be treated as a balancing charge.
- The disposal value of assets that benefit from the super-deduction, will be adjusted upwards by a factor of 1.3, except where disposals occur in accounting periods straddling 1 April 2023, resulting in a factor lower than 1.3. This rule does not apply to the 50% first-year allowance for special rate expenditures.
- Anti-avoidance provisions exist to counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose.
- Connected party transactions are also excluded from first-year allowances.
Annual Investment Allowance
Remember that the Annual Investment Allowance, which is available to sole traders, partners and companies, provides 100% relief for plant and machinery investments up to £1 million until 31 December 2021. Please note that this limit reverts to £200,000 from 1 January 2022.
Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026.