In the Spring Budget earlier this year, the government announced that the temporary Annual Investment Allowance (AIA) cap of £1 million would be extended until 31 December 2021. The Chancellor, delivering the Autumn Budget revealed that the temporary cap will now be extended further until 31 March 2023.

The government says that this move is intended to have positive outcomes for businesses by supporting and encouraging business investment, particularly those that are ineligible for the super-deduction, and by simplifying the tax relief for such investment. The change should also encourage investment in qualifying plant and machinery over the next 17 months.

The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery to be deducted from profits before tax. The relief is normally capped at £200,000 per annum but was initially increased to £1 million from 1 January 2019.

This temporary limit of £1 million is a generous allowance and should cover the annual spend of most small and medium sized businesses. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

The extension in the temporary limit means that businesses thinking of incurring large items of capital expenditure will now have additional time to consider their options during these uncertain times. There are complex transitional rules so the timing of any purchase should be carefully considered.

Are you thinking of investing in new plant or other equipment? Remember that the super-deduction offering 130% first-year tax relief is available to companies until March 2023.

The super-deduction tax break was introduced on 1 April 2021 and allows companies to deduct 130% of the cost of any qualifying investment on most new plant and equipment that would ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 a business invests they can reduce their tax bill by up to 25p. The temporary tax relief applies on qualifying capital asset investments until 31 March 2023. 

The super-deduction is designed to help companies finance expansion in the wake of the coronavirus pandemic and help to drive growth. 

In addition, an enhanced first year allowance of 50% on qualifying special rate assets has also been introduced for expenditure within the same period. This includes most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. 

The measures have effect in relation to qualifying expenditure from 1 April 2021, and exclude expenditure incurred on contracts entered into prior to Budget Day, 3 March 2021.

Capital Allowances are the deductions which allow businesses to secure tax relief for certain capital expenditure. Capital Allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable to Corporation Tax.

The Capital Allowance legislation does not specifically define plant and machinery (P&M). However, there is legislation that makes it clear that most buildings, parts of buildings and structures are not P&M. 

An interesting case dating back to 1982 helps to confirm this point of view. The decided case concerns a company that spent money on décor items such as light fittings and wiring as well as decorative items such as wall plaques, tapestries, murals, prints and sculptures. It was accepted that electric wiring was part of the fabric of the building but not the other decorative assets. 

HMRC’s internal guidance states that inspectors should only accept that items of decor are plant if the taxpayer can show that:

• the trade involves the creation of atmosphere/ambience and in effect the sale of that ambience to its customers; and
• the items on which plant or machinery allowances are claimed were specially chosen to create the atmosphere that the taxpayer is trying to sell.

For example, a painting on an accountant’s office wall that is owned by the accountant is not plant because selling atmosphere is not part of an accountant’s business.

There are special rules that must be followed when you sell an asset on which capital allowances have been claimed. Capital allowances is the term used to describe the tax relief businesses can claim on certain capital expenditure and thereby reduce the amount of taxable profits.

The sales value is usually the sales price. If you gave the asset away, stopped using the asset or sold it for less than it was worth then the market value should be used.

If you originally claimed 100% tax relief on the item, the business is required to add back the difference to their taxable profits. This is known as a balancing charge. A balancing charge is effectively a way of ensuring that a business does not claim more tax relief than they were entitled to on the purchase of a business asset. The balancing charge works in the opposite way to a capital allowance and increases the amount of profit on which tax is due.

If you originally used writing down allowances, you may have a balancing allowance or a balancing charge.

There are special rules for dealing with any balancing charges or balancing allowances where a business ceases to trade.

Designed to help offset the increased Corporation Tax main rate and promote investment, the Chancellor announced the introduction of a new ground breaking super-deduction tax relief. The new temporary tax relief applies on qualifying capital asset investments and will apply from 1 April 2021 until 31 March 2023. The new super-deduction is designed to help companies finance expansion in the wake of the coronavirus pandemic and help to drive growth. 

The measure will apply to qualifying expenditures as follows:

• a super-deduction providing allowances of 130% of most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
• a first year allowance of 50% will apply to most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances

The measure will apply to qualifying expenditure from 1 April 2021 and will exclude expenditures incurred on contracts entered into prior to Budget day, 3 March 2021. Certain expenditures will be excluded. 

The government had also previously announced that the temporary Annual Investment Allowance (AIA) cap would be extended for a further 12 months. The AIA allows for a 100% tax deduction on qualifying expenditure on plant and equipment. The temporary limit of £1 million will remain in place until 31 December 2021 before reverting to the usual £200,000 limit.

In a welcome move, the government has announced that the temporary Annual Investment Allowance (AIA) cap will be extended for a further 12 months until 1 January 2022. The government says that this move is intended to boost confidence as companies look to weather the pandemic and plan for the future. This should also encourage investment on qualifying plant and machinery over the next 12 months.

The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery to be deducted from your profits before tax. The relief is normally capped at £200,000 per annum but was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020.

This increased temporary limit is a generous allowance and should cover the annual spend of most small and medium sized businesses. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

The extension in the temporary limit means that businesses thinking of incurring large items of capital expenditure will now have additional time to consider their options during these uncertain times. There are complex transitional rules so the timing of any purchase should be carefully considered.

The Annual Investment Allowance (AIA) allows for a 100% tax deduction on qualifying expenditure on plant and machinery to be deducted from your profits before tax. The relief is normally capped at £200,000 per annum but was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020.

This means that there is now just over two months left to take advantage of the increased limit. If you are thinking of incurring large items of capital expenditure for your business (over £200,000), the timing of such a move should be carefully considered. There could be a significant tax advantage if you accelerate plans, where possible, to incur expenditure before the end of the 2020.

There are transitional rules for businesses whose accounting periods span the operative date of any changes. If the basis AIA changed in the period for which a claim is being made, the AIA must be time-apportioned accordingly.

The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

A claim for AIA must be made in the period the item was bought. This date is defined as the date when a contract was signed – if payment is due within 4 months of the contract being signed – or the actual payment date if it’s due more than 4 months later.

As always, it is important to consider commercial, cashflow and other matters as well as the tax effects. If you are contemplating a large capital purchase please call so that we can help you decide on the best-fit planning opportunities. 

Enterprise zones were first launched in 2011 and are specific geographic areas that provide various tax breaks and government support. Businesses that set-up in enterprise zones can benefit from up to 100% first year capital allowances for qualifying investments in plant and machinery.

This benefit was expected to have ended on 31 March 2020. However, the government announced at Spring Budget 2020, that these capital allowances will remain available for expenditure incurred in relation to all areas, whenever designated, until at least 31 March 2021.

The enterprise zone must also be located within an Assisted Area which is specified within Section 1 Industrial Development Act 1982 or Northern Ireland. The qualifying expenditure must be incurred within a period of 8 years beginning with the date the specific area is treated as having been designated.

The government has confirmed that the period for which the 100% first year allowances (FYAs) are available is to be extended from April 2021 to April 2025. In tandem with this announcement, there is also a significant reduction in the CO2 emission thresholds which are used to determine the rate of capital allowances available for business cars.

This means that the 100% writing down allowance (WDA) will only be retained for zero emission vehicles (ZEVs). The threshold will be reduced from 50g/km to 0g/km. The measure is designed to incentivise the uptake of zero CO2 emission vehicles. The main rate WDA of 18% will apply to other cars with emissions up to 50g/km (was up to 110g/km). The special rate WDA of 6% will apply to higher polluting cars with emissions above 50g/km.

The FYA allows companies to set the full cost of qualifying cars against their tax bills in the year the cars were purchased. The FYA is only available on the purchase of new cars, second-hand cars do not qualify for FYAs (but can claim WDAs). If claiming the full amount of FYA would create a loss, it is also possible to claim less than the full 100% FYA and claim the balance using writing down allowances.

The Structures and Buildings Allowances (SBA) facilitates tax relief on qualifying capital expenditure on new non-residential structures and buildings. The relief applies to the qualifying costs of building and renovating commercial structures.

The relief was introduced with effect from 29 October 2018, at an annual rate of 2% on a straight-line basis (over 50 years). As part of the Budget measures, the Chancellor has announced an increase in the annual allowance to 3% from 1 April 2020, for businesses within the charge to corporation tax and from 6 April 2020, for businesses within the charge to income tax. This new relief will provide businesses with over £1 billion in additional relief by the end of 2024-25.

The increased rate of relief will help further support business investment in constructing new non-residential structures and buildings including necessary preparatory costs, and the improvement of existing ones. The announcement will also help improve the international competitiveness of the UK’s capital allowances system.

Businesses whose chargeable period spans 1 April (corporation tax) or 6 April (income tax), may claim 2% per year for days in that period before the operative date and 3% for days thereafter. No relief is available where parts of the structure qualify for other allowances, such as Plant & Machinery allowances.