Be aware of upcoming changes to capital allowances
12 July 2022
During the last 12 months, capital allowances planning has been key for businesses as they navigate through the impact of the COVID-19 pandemic. As clients make decisions on their capital expenditure programmes over the coming months, changes to the super deduction and Annual Investment Allowance rules will have an impact on the tax relief available.
Super deduction
The Corporation Tax 130% super deduction for qualifying plant and machinery expenditure was well publicised in the press, and companies were therefore generally well aware of the headline 130% rate, in that it related to expenditure on new and unused plant and machinery for two years from 1 April 2021.
What was less well publicised is the complexity of the rules in so far as they relate to the timing of expenditure. This was initially an issue in respect of the rule preventing the super deduction where there was a contract in place before 3 March 2021 (the Budget 2021 date), but there could be similar complexities from a practical perspective as the super deduction reaches its demise at the end of March 2023.
For companies with a March accounting year end, the position is perhaps more straight forward in that the 130% super deduction will be available in full on qualifying expenditure for the accounting year end to 31 March 2023.
However, where there is an accounting period that ends after 1 April 2023, the available super deduction will reduce from 130% to the figures shown in the table below.
| April 2023 | 335 days @ 130% = | 128% |
| May 2023 | 304 days @ 130% = | 125% |
| June 2023 | 274 days @ 130% = | 123% |
| July 2023 | 243 days @ 130% = | 120% |
| August 2023 | 212 days @ 130% = | 117% |
| September 2023 | 182 days @ 130% = | 115% |
| October 2023 | 151 days @ 130% = | 112% |
| November 2023 | 121 days @ 130% = | 110% |
| December 2023 | 90 days @ 130% = | 107% |
| January 2024 | 59 days @ 130% = | 105% |
| February 2024 | 31 days @ 130% = | 103% |
These dates may seem far away, but could affect the tax relief on expenditure incurred in May 2022 for a company with a 30 April 2023 year end.
Annual Investment Allowance
Following the extension of the temporary £1 million Annual Investment Allowance (AIA) until 31 March 2023, consideration also needs to be given for transitional rules for the proposed reduction of the AIA limit to £200,000.
Again, the position for a business with a 31 March year end is straight forward in that an AIA limit of £1 million would apply for the year ended 31 March 2023 and an AIA limit of £200,000 would apply for the year ended 31 March 2024. This of course is based on a single business eligible for AIA (in some cases AIA must be shared between businesses under common control and only partnerships comprising entirely of individuals can claim AIA).
For year ends from April 2023, the transitional rules will have an impact on the maximum AIA available of a business for an accounting period (Schedule 13 Finance Act 2019).
AIA @ £1 million per annum £ | AIA @ £200,000 per annum £ | Maximum AIA £ | Maximum AIA £ | |
|---|---|---|---|---|
| April 2023 | 917,808 | 16,438 | 934,246 | 16,438 |
| May 2023 | 832,877 | 33,425 | 866,302 | 33,425 |
| June 2023 | 750,685 | 49,863 | 800,548 | 49,863 |
| July 2023 | 665,753 | 66,849 | 732,602 | 66,849 |
| August 2023 | 580,822 | 83,836 | 664,658 | 83,836 |
| September 2023 | 498,630 | 100,274 | 598,904 | 100,274 |
| October 2023 | 413,699 | 117,260 | 530,959 | 117,260 |
| November 2023 | 331,507 | 133,699 | 465,206 | 133,699 |
| December 2023 | 246,575 | 150,685 | 397,260 | 150,685 |
| January 2024 | 161,644 | 167,671 | 329,315 | 167,671 |
| February 2024 | 84,932 | 183,014 | 267,946 | 183,014 |
For unincorporated businesses and companies where no super deduction is available (for instance for “used” plant and machinery), the timing of the expenditure will be critically important. Taking the example of a business with a 31 December 2023 year end, if the business buys a £300,000 machine in March 2023 it will receive 100% AIA on the entire purchase. Whereas the same business buying that machine in April 2023 will only be able to claim £150,685 AIA due to the transitional rules.
Timing
The general rule is that capital expenditure is to be treated as incurred as soon as there is an unconditional obligation to pay it (although there are special rules where there is deferred consideration and anti avoidance rules to avoid an unconditional obligation to pay an amount of capital expenditure on a date earlier than normal commercial usage).
The timing of Capital Allowances on Hire Purchase assets is based on when the asset is brought into use.
Both these rules have an impact on the available super deduction or Annual Investment Allowance available. This could cause practical issues for businesses where there is a long lead time for plant and machinery (for some, an asset ordered today may not arrive before March 2023) and this is made worse in some cases due to the impact of COVID, Brexit, and other global factors on component parts (particularly relevant for vehicle and machine purchases) that are outwith your control.
Get in touch
To discuss the implications of the above points on your business and planned expenditure, get in touch with our Construction & Property Incentives team.
