As an incentive to encourage and accelerate capital investment and drive growth, the Government announced a series of generous capital allowances measures in the recent 2021 Budget.
The announcements provide valuable incentives rarely seen before, providing tax savings of approximately 25p for every £1 of expenditure, with a recent survey by Make UK1 showing that around a quarter of the respondents plan to increase and bring forward investment as a direct result of the announcement. However, these reliefs seldom come without some downsides that need to be considered and navigated by companies planning capital expenditure over the new few years.
Overview of key announcements
The headline announcement was the new ‘super deduction’ at a rate of 130% for capital investment in new plant and machinery, which would otherwise attract an annual writing-down allowance of 18%. This sits alongside a 50% first-year allowance - referred to as an ‘SR allowance’ - for qualifying special rate expenditure, usually relieved at 6% per annum, and applies to assets such as integral features (general electrics, plumbing, heating and cooling etc) and long-life assets.
The super deduction and the SR allowance are only available to companies within the charge to corporation tax, so they are not available to individuals or partnerships.
Additionally, the temporary £1m cap on the Annual Investment Allowance (AIA) has been extended for a further 12 months until December 2021 when it is due to fall to £200k.
These are generous investment incentives for companies, with the super deduction providing cash savings of £24.75 for every £100 invested and the SR allowance similarly accelerating £9.50 of tax relief for every £100. There are, however, several issues that companies need to consider and plan for in advance to optimise the benefit of these reliefs.
Steps that companies should take now
Review the timing of payments and contracts – The super deduction and SR allowance are only available for expenditure incurred between 1 April 2021 and 31 March 2023, in relation to contracts entered into after 3 March 2021. We recommend that companies review their planned capital expenditure and the details of any existing contracts.
There is specific legislation determining when expenditure is incurred for capital allowances purposes. This includes expenditure in relation to milestone and hire purchase contracts, the latter of which has been tightened under the new super deduction and SR allowance provisions, which could be particularly relevant for companies that acquire large items of plant and machinery. Extra care should also be taken to review expenditure under master framework agreements that may have commenced prior to 3 March 2021.
Model projected expenditure, available reliefs and future disposal plans – Balancing charges, which are taxable income, arise when assets are sold for consideration. The amount of the balancing charge is based on the amount of super deduction or SR allowance claimed and the relevant disposal value.
The new reliefs are available alongside existing capital allowances and incentives, such as AIA, short-life asset elections and research and development allowances, which generally do not have the same ‘claw back’ provisions.
With corporation tax rates due to increase to 25% from April 2023, property investors or companies acquiring plant and machinery with potential residual or trade in values - for example, vans, computers or mobile plant - should model their capital expenditure plans and the potential tax reliefs to ensure that claims made today do not have a negative impact in the future.
Additional care will also be needed to track super deduction and SR allowance claims, particularly for longer term projects or expenditure that spans the new relief provisions, adding further administrative complexity.
Consider the impact of exclusions for leased assets – Plant and machinery used for leasing activities is excluded from qualifying for the super deduction and SR allowance. In addition to leasing companies, we have seen this impact group arrangements, such as construction or manufacturing companies that have internal plant leasing companies. These organisations should review their structures and consider whether or not they are still appropriate or if alternative structures could provide better returns on their investment.
Good news for commercial landlords – There was significant concern from commercial landlords that the leasing exclusions in the initial draft legislation also excluded companies from claiming these reliefs on plant and machinery included within a property lease. This initial view was confirmed by HMRC.
The Treasury has, however, listened to various representations from within the sector and professional bodies and has amended the legislation so that the leasing exclusion does not apply to ‘background plant and machinery’ within a building.
This is great news for property investors and corrects what seemed to be a strange exclusion, considering the intention of the policy is to stimulate investment and help kick-start the economy.
The concept of background plant or machinery already appears in the capital allowances legislation, so there is existing guidance to help determine what is covered by this definition. Broadly, background plant and machinery is ‘that which you would ordinarily expect to be installed in a particular type of building, to enable it to function as that facility’. This may be fairly clear for a standard building. Care needs to be taken in other circumstances, including where additional facilities are provided in line with an increased focus on occupier welfare and experience, or where production equipment is included within a property lease.
Optimise plant and machinery identified – With the new super deduction and SR allowance only available for qualifying plant and machinery, and generally not for structural works, it is important to identify all expenditure falling within this category, such as alterations to an existing building to install plant and machinery, and associated professional fees.
How we can help
The significant increase and divergence in the rates of relief available under the capital allowances regime, together with the added administrative complexities, mean that professional advice that can be built into a detailed cost segregations exercise is more important than ever.
Smith & Williamson’s capital allowances specialists can help you manage your capital investment strategy over the next few years, ensuring that you optimise retained allowances and minimise potential balancing charges.
1 Make UK - Survey of 149 companies, conducted between 17 and 24 March 2021. https://www.makeuk.org/news-and-events/news/investment-set-for-superdeduction-boost-for-manufacturers-make-uk-survey
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.