The Chancellor’s budget announcement in March set out plans for a new Capital Allowances relief exclusive to Companies. For expenditure incurred from 1 April 2021 until 31 March 2023, companies can claim 130% capital allowances on qualifying plant and machinery and 50% first year allowances on special rate investments.
In order to claim these enhanced reliefs, there are a number of considerations including:-
- Ensuring the expenditure is incurred between 1 April 2021 and 31 March 2023 (if the contract is entered into before 3 March 2021 but expenditure incurred from 1 April 2021, enhanced reliefs will not be available). Be aware that where an accounting period straddles 31 March 2023, a reduction is made to the percentage that can be claimed. For example, a company with a year end of 31 December 2023 will only be able to claim the Super Deduction at the rate of 107.4% as opposed to 130% on any qualifying main pool expenditure.
- The assets must be new and unused and not second hand.
- Reliefs are not available for certain expenditure including cars, assets leased out or assets purchased from connected parties. HMRC recently announced a change in the restriction for leased assets. It will not apply to qualifying assets included in buildings which are leased out, therefore enabling landlords to benefit from the relief. Unfortunately the restriction for other rental assets remains in place.
- The enhanced reliefs cannot be claimed in a period where the company’s qualifying activity is permanently discontinued.
- There are tighter restrictions in relation to Hire Purchase contracts. In addition to being brought in to use, the relief is only available where the relevant plant or machinery is delivered to the claimant company under the hire purchase contract without transfer of ownership in return for periodical payments by that company. Ownership of this plant and machinery must pass to that company when for example, the company exercises an option to purchase. If a fellow group company enters into an HP agreement on their behalf, these assets will not qualify
- There is a sting in the tail if a company disposes of an asset which has been subject to the enhanced reliefs. Any proceeds will be treated as a balancing charge and fully taxable in the year of disposal. If the disposal is in a period that commences before 1 April 2023 there could be an additional clawback.
- AIA can still be claimed where qualifying expenditure does not meet the super deduction criteria. A reminder that this is £1m until 31 December 2021 but is due to reduce to £200,000 from 1 January 2022.
- It will be imperative that accurate records are maintained by Companies to back up any claims that are made in particular to contract/purchase dates and ensuring they are unused and not second hand.
- Companies should also be aware of the potential impact on the initial increase in the potential deferred tax provision given the timing differences arising between depreciation and allowances. Although deferred tax is only for accounts purposes, it could have a significant impact on a company’s balance sheet where expenditure levels are high.
The significant Cashflow Benefit is evident in the following example
A company incurring £500k of qualifying expenditure claims the 130% super-deduction resulting in the following:-
- A deduction of £650k (130% of the initial investment) available to offset against its taxable profits
- For a tax paying company this will reduce the corporation tax payable by £123,500. Compare this to the position if allowances were only available at 18% per annum where the reduction in tax is only £17,100, the cash flow benefit becomes very evident.
- For a loss making company this will increase the current year trading losses. In addition to the usual loss treatment, there is a temporary increase to the loss carry back rules meaning they can be carried back 3 years instead of 1 year. There are restrictions on the amount that can be carried back so ensure you are fully aware of these before submitting a claim.
If you would like to discuss the reliefs in more details, please contact Lesley Connon or your usual AAB contact.