Capital Allowances – Deadline for maximising tax relief on future business investment

Some of the announcements were in line with promises made during the Conservative party leadership contest, and others will certainly have come as a major shock to economists.

With the announcements now made, businesses can begin to plan ahead with a degree of more certainty and seek to maximise the opportunities presented. The Annual Investment Allowance is one item which is always under scrutiny during budgets, but no more, with the limit now to be permanently set at £1million per year.

The reduction of the 2023 Corporation Tax rate to 19% (or scrapping of Mr Sunak’s proposed increase to 25%, depending on how you view it), will be welcomed by businesses. The initial announcement, in March 2021, of the planned increase in corporation tax to 25%, came alongside the introduction of the temporary “Super Deduction” for qualifying capital expenditure, seeking to prevent companies from deferring capital projects in order to obtain tax relief at the new higher Corporation Tax rate.  However, the Government’s latest announcement to scrap this planned increase presents a time limited opportunity for companies to maximise their tax relief on capital expenditure before the “Super Deduction” expires on 31 March 2023.

The “Super Deduction” is a temporary 130% first-year allowance for qualifying expenditure incurred between 1 April 2021 and 31 March 2023 on plant and machinery within the main capital allowance pool, which would otherwise attract a writing down allowance of 18% per annum on a reducing balance basis.  By providing an additional 30% deduction of qualifying spend when the tax rate was 19%, the resultant effective tax relief increased temporarily to 25p in the pound.  This meant that regardless of whether the expenditure was incurred pre or post April 2023, the same relief would have been available.

This is no longer the case.  From April 2023, the effective rate of relief will effectively fall to 19p in the pound.

On account of these changes, and taking into account the current rate of inflation, there is now a compelling argument to fast track any qualifying investment to take place before the end of the “Super Deduction” on 31 March 2023.  Qualifying spend broadly includes plant and machinery, furnishing and some elements of new build and refurbishment expenditure of commercial premises.

Prior to the energy crisis, the economy experienced somewhat of a ‘post-pandemic boom’.  In times of growth and profitability, it is common for businesses to neglect their tax position as management attention is focused on driving expansion.  In terms of Capital Allowances, it is equally important to look backwards.  Any expenditure incurred on acquiring or refurbishing commercial premises, regardless of how long ago it was undertaken, is eligible to be considered for tax relief, provided the asset is still owned by the business.

If you would be interested in discussing the opportunities to maximise the tax impact of historic and future capital expenditure, please do get in touch.