Rules for tax relief on capital expenditure

A new “super-deduction” for capital expenditure on plant and machinery was announced in March 2021 and will apply to expenditure between 1 April 2021 and 31 March 2023.

The super-deduction is an enhanced capital allowance giving a 130% deduction in the year of acquisition for qualifying plant and machinery or a 50% deduction for qualifying special rate pool assets.  There is no limit to the amount of expenditure eligible for this new super-deduction and it is available to any business within the charge to corporation tax (but not sole traders, partnerships or LLPs).

What is qualifying expenditure? –

  • The 130% super-deduction is available for capital expenditure on plant and machinery that would normally qualify for the capital allowances main pool i.e. plant, machinery, computer equipment, furniture, software, commercial vehicles.
  • The 50% first year allowance is available for capital expenditure on plant and machinery that would normally qualify for the special rate pool i.e. electrical systems including lighting, hot and cold water systems, space and water-heating systems, air-conditioning and air-colling systems, external solar shading, lifts & escalators, thermal insulation.

Note – there is a non-exhaustive list of qualifying assets at:

https://assets.publishing.service.gov.uk/government /uploads/system/uploads/attachment data/file/967202/Super deduction factsheet.pdf

Are there any other conditions?

  • The asset must be new and unused – expenditure on second-hand equipment will not qualify.
  • The asset must be purchased between 1 April 2021 and 31 March 2023.
  • The allowance does not include expenditure on cars or connected party transactions.
  • Note that the super-deduction is not available for contracts entered into pre 3 March 2021 even if the expenditure takes place later.

 

What about the Annual Investment Allowance (“AIA”)?

The £1m AIA is still available for expenditure up to 31 December 2021 and will exist alongside the new super-deduction allowances.

To obtain best use of the various allowances, the AIA should generally be claimed as follows:

  1. On second-hand plant & machinery which does not qualify for the super-deduction.
  2. By sole-traders, partnerships and LLPs who do not qualify for the super-deduction.
  3. On special rate pool expenditure up to the £1m limit as the 100% AIA is still more beneficial in the year of acquisition than the 50% super-deduction for these assets.

For any assets which do not qualify for the super-deduction and exceeds the £1m AIA, normal capital allowances will continue to be available at 18% (main pool) and 6% (special rate).  Note that the Structures and Buildings Allowance at 3% is also available for expenditure on structures.

In some cases the allocation of assets to the different pools will be straight forward.  In other cases there will be complexity particularly if assets may be disposed of in the relatively short term – i.e. before 31 March 2023, as balancing charges could kick in.

Each business invests in a unique mix of plant & machinery and capital equipment.  We have a team of Business Tax advisers who will be happy to help you with any queries you have in relation to tax relief for your capital expenditure and about accessing the super-deduction.

 

If you have any questions or concerns on any of the above, get in touch with our tax team on support@garbutt-elliott.co.uk