When the Covid-19 pandemic hit, it caused worldwide economic distress. The lockdowns and forced closures of non-essential trades and effectively slowed business investment to a trickle. On the 3rd of March 2021 the then Chancellor, Rishi Sunak, announced two new temporary first year allowances to assist in boosting investment again. Companies investing in qualifying equipment would be eligible for a “super-deduction” and “Special Rate allowance”.
To understand the benefit of these new allowances it is necessary to understand how companies obtain tax relief on assets that they purchase. From an accounting perspective, any asset which is acquired is recognised on the company’s balance sheet, and depreciated on an annual basis in order to recognise that the assets value will deteriorate over time. For tax purposes, this annual depreciation charge is not an expense which is deductible when calculating the company’s taxable profits. Instead, a company claims capital allowances against the cost of the assets acquired. The rate at which capital allowances are given against an asset generally depends on the type of the asset. Prior to the introduction of the super-deduction, companies were able to claim a capital allowance equal to 100% of the cost of a qualifying asset up to a certain overall cap which has changed on multiple occasions over the last few years. This capital allowance is called the Annual Investment Allowance (AIA), and the overall cap is currently set at £1 million.
The super-deduction provided companies with a deduction against their profits of an amount equal to 130% of an uncapped amount of qualifying expenditure on main pool plant and machinery. This would include items such as plant and machinery, office furniture, computer equipment, commercial vehicles. The Special Rate allowance provided a deduction equal to 50% of uncapped qualifying expenditure on special rate pool assets including long life assets. This would include items such as lighting, heating and water systems.
Both new allowances sparked a great deal of interest especially from company directors who had felt short-changed by the other support packages. However, it was designed to be a temporary measure, the allowances would only be available for two years from the 1st of April 2021 to the 31st of March 2023.
The hope was that the promise of additional tax relief, alongside the existing AIA, would incentivise companies to go on a spending spree and shake off their covid-induced hibernation. It also took into account the fact that overall Corporation Tax rates were forecast to increase from 1 April 2023 and so the government did not want businesses to wait to invest until then if they would have received larger discounts to their corporation tax bills with investment taking place from that point on.
For the super-deduction, the qualifying plant and machinery must be brand new and covers everything from solar panels to computer equipment, tractors and pickup trucks. It has been a success so far with companies taking advantage of the uncapped expenditure limits, compared to the previously £1m AIA cap.
We are eighteen months into the two-year window of the super-deduction and this temporary relief will be ending shortly. The question now is, what happens next?
Our reliefs for capital expenditure have never been particularly generous when compared to the rest of world, and introducing these additional allowances suddenly put us at the top of table for the Organisation for Economic Co-operation and Development (OECD) average of net present value for capital allowances. When the temporary allowances end, we are predicted to drop down to 30th out of 38 countries on that list.
We are in the midst of a Cost-of-Living Crisis, with a newly appointed Prime Minister and Chancellor. Their emergency Mini-Budget cancelled the planned increases to corporation tax which were due to take effect from 1 April 2023, keeping rates at the existing 19%. They also confirmed that the AIA threshold would be kept at £1M indefinitely.
Given the new administration’s focus on reducing tax, it is perhaps surprising that they chose not to announce the extension of the super-deduction, and perhaps a further announcement could still be made at the next Budget.
In May 2022 the Treasury announced a consultation to look into several options for providing tax relief on capital expenditure. The options currently under review including:
Increasing writing down allowances (WDAs) from 18% and 6% to 20% and 8% respectively, to directly benefit those spending over the AIA limit.
Introducing an additional First Year Allowance for main rate and special rate assets of 40% and 13% respectively. This would provide additional support to companies investing heavily in a single year.
Adjusting the additional relief in first year allowance to 20% rather than the current 30%, to retain the bonus element on top of 100% allowances of the expenditure.
Introducing full expensing of expenditure in the year it occurs. Currently no other country in the G7 has implemented this strategy on a permanent basis.
Removing the claw back on disposals of assets on which these additional allowances have been claimed.
Our new Chancellor may choose a different replacement altogether, which may improve incentives. He could also choose not to replace or extend the reliefs at all having already cemented the AIA cap at £1m.
One thing is certain, whilst the super-deduction is still available, companies should seek to utilise them whilst they can. With the proposed increases to Corporation Tax now cancelled, there is no tax advantage in delaying expenditure to the next tax year.
Sophie Murphy, Tax Manager
If you would like to discuss any of the above, please speak to one of our Legal Sector experts on 0808 144 5575
