In our latest edition of Capital Allowances Tax Talk, Mark Anthistle, Senior Consultant, Capital Allowances Tax Analysis, focuses on the changes to capital allowances announced by the Chancellor in the Spring Budget 2023 and what they mean for the UK taxpayer.
1. Super-Deduction
Introduced as part of the Spring Budget 2021, Super-Deduction allowed tax relief for companies on 130% of the cost of qualifying Main Rate Plant & Machinery investments acquired as new between 1 April 2021 and 31 March 2023.
It was hoped by many it would be announced by the Chancellor that the availability of this generous form of tax relief would be extended beyond the original deadline, however this was not meant to be, and it was confirmed that Super-Deduction will be withdrawn as previously stated.
It is thought this is due to fact that the period of Super-Deduction ends with the reintroduction of the Main Rate of Corporation Tax, where some companies will pay tax at 25% going forward. Potentially, there is no loss of benefit, as 130% tax relief at a Corporation Tax Rate of 19% is essentially the same as 100% tax relief at a Corporation Tax Rate of 25%.
2. Full Expensing
Instead, the Chancellor announced the introduction of Full Expensing, which offers a 100% First-Year Allowance (FYA) to companies on new and unused qualifying Main Rate Plant & Machinery investments from 1 April 2023 until 31 March 2026, however there is already talk of this becoming a permanent allowance.
Full Expensing bears a striking resemblance to Annual Investment Allowance (AIA), but with some significant differences. Unlike AIA, there is no upper limit to the amount of qualifying expenditure that can be full expensed, it is only available on new and unused qualifying Plant & Machinery which would normally qualify for the Main Rate Pool, and it is not available to Income Taxpayers (i.e. sole traders and partnerships).
3. 50% First-Year Allowance
There was more positive news regarding the 50% First-Year Allowance (FYA) available on new and unused Special Rate Plant & Machinery additions. Introduced alongside Super-Deduction in 2021, this allowance, originally intended to be withdrawn on 31 March 2023, has been extended until 31 March 2026, and will run alongside Full Expensing, with a similar expectancy that this too will become a permanent allowance.
Again, this allowance offers an uncapped limit on new and unused qualifying Special Rate expenditure incurred by companies with the balance added to the pool and written down in future accounting periods, as per standard WDA instructions. Please note, it is understood that AIA is unavailable on this balance.
4. Annual Investment Allowance (AIA)
AIA is known by some as the “Yo-Yo Tax” because of its significant rise and fall in levels since it was originally introduced in 2008, but the latest Budget has apparently cut the string with the long-anticipated confirmation that AIA will remain permanently at £1 million. This is a welcome announcement and a far cry from the lowly days of £25,000.
The existing transitional rules applying to chargeable periods straddling 1 April 2023 will also be repealed. Originally, it was muted that the rules would still apply following the change from temporary to permanent, even though the level of AIA has not changed, meaning AIA would have to be apportioned between the two periods straddling 1 April 2023. Thankfully, common sense prevailed, and no apportionment is required.
5. Electric Vehicle Charge-Points First-Year Allowance
One other minor point to note is that there has been an extension of two years to 31 March 2025 for Corporation Taxpayers (5 April 2025 for Income Taxpayers) for 100% FYA on electric vehicle charge-points.
Summary
The announcement of Full Expensing, on the face of it, sounds like a positive addition to the UK tax regime, however when you take a deeper dive and consider the £1 million AIA being made permanent, it will have little to no impact on the majority of UK businesses.
As relief is offered at 100% of the cost (as opposed to the 130% available with Super-Deduction) a company would have to make over £1 million of Plant & Machinery investment annually to exceed the AIA limit (also offering relief at 100% of the cost) and fall into the realms of Full Expensing. The reality is that most Corporation Taxpayers will not come anywhere near this threshold.
Similarly, with the 50% FYA, a company would have to exhaust their £1 million AIA with Special Rate Pool expenditure (assuming all Main Rate Plant & Machinery would take advantage of Full Expensing) before even considering this form of tax relief which forces the 50% balance to be claimed at 6% WDA in future tax years.
All in all, there were some positives announced from the Chancellor in this Spring Budget, but some of these positives will only be enjoyed by a small minority of large UK companies.