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So, what tax reliefs exist for capital investments?
Around this time last year, the Government introduced a temporary ‘super-deduction’ for qualifying capital expenditure, which allows companies to cut their tax bill by up to 25p for every £1 of capital investment between 1 April 2021 and 31 March 2023. This ‘super-deduction’ has been one of the most attractive tax incentives for capital investment in modern history.
With the ‘super-deduction’ coming to an end in April 2023 and the 100% Annual Investment Allowance (‘AIA’) due to reduce from £1m to £200k then also, concern existed prior to the Spring Statement that the Government was no longer committed to incentivising companies for capital investment. This concern was further heightened by the looming increase in the corporation tax rate - from 1 April 2023, your company could be paying corporation tax at 25% if your profits exceed £250k.
However, during his Spring Statement address, the Chancellor sought to subdue such concerns by announcing that the Government will consult on potential changes to the UK’s capital allowance regime over the summer. The objective of this is to facilitate future business capital investment, which in turn, should drive growth across the UK and raise tax competitiveness.
Initial proposals include an increase in the permanent level of AIA to say £500k, which would enable companies to deduct up to £500k against taxable profits in the year of expenditure. The AIA threshold has fluctuated over the last number of years, and was temporarily increased to £1m. Whilst lower than the current limit, the introduction of the permanent level of AIA will offer consistent levels of tax relief, helping with your investment planning.
Another option under consideration is the introduction of a permanent additional deduction, bringing the overall amount that can be claimed to greater than 100% of the initial cost. An additional capital allowance of 20% has been mooted for the first year, on top of standard writing down allowances on the initial cost across the first and subsequent years. This would allow companies to cut their tax bill by up to 30p for every £1 of capital investment.
The government also mentioned introducing a First Year Allowance for main and special rate assets, where companies can deduct, for example, 40% and 13% in the first year, with the remaining expenditure written down at standard allowances.
Whilst the spring budget does not contain concrete details on what the capital allowances regime will look like moving forward, it’s encouraging that the Government remains focused on providing generous tax reliefs on capital investment beyond March 2023. If your business is planning to make substantial capital investments, you should consult with your tax advisor as soon as possible to ensure that you are in the best position to benefit.