As we begin to see tentative steps taking us out of lockdown and consumer confidence begins to increase, many businesses are now considering whether they need to invest in their premises and other fixed assets to position themselves for the new normal, whatever that may look like. There have been a number of significant tax announcements made recently which could have a major impact on plans for capital expenditure. This article looks at the new tax reliefs available for those companies that are within the charge to Corporation Tax and explains briefly what qualifies under each of the new reliefs.
In the UK Budget held on 3 March 2021 the Chancellor, Rishi Sunak, announced some significant changes to the capital allowances available to businesses that are under the charge of corporation tax. The new tax reliefs covering capital allowances that businesses should be aware of are:
- A ‘super deduction’ of 130% for spend on new qualifying assets.
- A first year allowance of 50% on most new plant and machinery expenditure that would normally qualify for the special allowance on fixtures and fittings which are an integral part of a building.
- There is now good news for commercial property landlords, with the super deduction now applying to relevant expenditure after an amendment to the Finance Act.
When is a deduction a super deduction?
For expenditure incurred between 1 April 2021 and 31 March 2023, companies spending money on new qualifying plant and machinery, can now claim a super deduction of 130%. This replaces expenditure that would ordinarily have qualified for an 18% main rate, albeit potentially eligible for a claim for annual investment allowance of 100%. Items purchased, and a super deduction claimed, must be separately identified so that if those assets are subsequently sold, the sale proceeds are grossed up by 130% in calculating the gain arising. Items of plant and machinery purchased must be new to qualify for the super deduction, any second-hand plant and machinery items, can still however qualify for the usual writing down allowance at 18%, or for the annual investment allowance if this is available.
What is the annual investment allowance (AIA)?
Normally businesses can only claim capital allowances on a percentage each year on assets bought for use in the business. The rate can vary depending on the nature of the asset purchased. The general rate is 18%, however, for any capital expenditure incurred in the period ended 31 December 2021, businesses can set up to £1m of expenditure on qualifying assets against their profits and obtain full tax relief in that year.
Super deduction or AIA?
The super deduction and AIA will run in parallel for a short period of time from 1 April 2021 to 31 December 2021. It is therefore important to categorise capital expenditure and to assess which allowance is appropriate to maximise your capital allowances claim.
For example, a business purchasing a brand new lorry on 1 May 2021 would qualify for the super deduction at 130%. However, if the lorry was second hand it would only qualify for Writing Down Allowances or Annual Investment Allowance.
First Year Allowance
For expenditure incurred during the period covering 1 April 2021 to 31 March 2023, a first year allowance of 50% is now available compared with the normal rate of 6% prior to 1 April 2021, on items qualifying as plant and machinery within integral fixtures and fittings. More detailed explanations of what is plant and machinery and what is integral fixtures and fittings is explained below.
What is plant and machinery?
In most cases, plant and machinery is relatively straightforward to identify, being tangible assets used in the course of a business.
Some items are obvious, such as computer equipment, chairs and desks, tools, machinery, heavy goods vehicles and even solar panels on a roof. Sometimes, the distinction is not clear, and in such situations it is important to take advice if obtaining tax relief is one of the drivers behind the planned capital expenditure.
What are integral fixtures and fittings?
As explained previously, capital allowances can be claimed on certain fixtures and fittings which form an integral part of a building. This can be expenditure carried out on a new building or on a subsequent refurbishment. Again, careful planning is important to identify any assets that would qualify, but typical examples are electrical systems, air conditioning and lighting systems. Before a programme of works is agreed, it is worth sitting down with the builder and architect to separately identify all assets which will be created as part of the new building or a refurbishment of an existing property.
What improvements are simply repairs?
Often when a refurbishment of a premises is taking place, much of the expenditure may simply be a repair which is allowed as a cost against your trading income. If the expenditure involves a capital improvement, then such expenditure is not an allowable expense against income but may qualify for the special capital allowances regime set out above. The tax legislation does not specifically define repairs, but it is generally seen as restoring an asset or the replacement of particular parts, rather than replacement of the whole asset. A capital improvement is something that goes beyond a basic repair, for example, if a storm caused damage to a roof and the roof was restored to its original state, this would be a repair. However, if the whole roof was removed and either an additional storey was added to the building or a flat roof became a pitched roof, then there could be an argument that there has been a capital improvement as you are going beyond the basic repair. There are also specific provisions in tax legislation for work carried out after recently purchasing a property and the expenditure was incurred to bring the property up to a state when it can properly function. Such expenditure is usually seen as capital but, again, it is a complicated area and needs careful planning.
Any businesses contemplating capital expenditure need to plan carefully and establish the nature and level of expenditure required. Ideally, for work being carried out on property advanced planning and discussions should be held with architects, builders and accountants that clearly establishes the nature of the expenditure. By doing so, business owners can make sure that all available tax reliefs are taken into account, and the business can ensure that the interaction between expenditure on property, along with potential expenditure on other plant and machinery items utilises the new reliefs available to the maximum potential.