Capital Allowances update

Michael Murray

Michael Murray

Construction & Property Incentives Partner

29 October 2018

    The Autumn Budget announced several key changes:

    • An increase in the Annual Investment Allowance
    • Introduction of a new Structures and Buildings Allowance
    • A reduction in the rate of writing down allowance for the special rate pool
    • An end to Enhanced Capital allowances and the first year tax credit

    Annual Investment Allowance (AIA)

    To help stimulate business investment, the Government will increase the AIA from £200,000 to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020.

    Structures and Buildings Allowance (SBA)

    Following on from recommendations issued by the Office of Tax Simplification earlier this year, the Government plans to introduce a new Structures  and  Buildings  Allowance  (SBA)  for  expenditure incurred on  non-residential  structures  and buildings. The relief will be introduced to fill the current gap in the UK capital allowances system where currently no relief is available for the expenditure incurred on most structures and buildings. It is proposed that SBA will be available on eligible construction costs incurred on or after 29 October 2018, at 2% per annum.

    The relief will be limited to the original cost of construction, and will be available on a straight line basis over a period of 50 years. Relief for expenditure incurred on an overseas structure or building will also be available on the same basis as for a UK structure or building, providing the person claiming the relief is undertaking a qualifying activity, the profits of which must be chargeable to tax in the UK. 

    Unlike previously available industrial buildings, hotel buildings and agricultural buildings allowances, there will not be a system of balancing charges or balancing allowances on disposal of the asset. Instead, a purchaser will continue to claim the annual allowance at 2% of the original cost until the expiry of the 50 year period.

    Two key points to note are that SBA expenditure will not qualify for the AIA and that both integral features and plant and machinery fixtures within a structure or building, will continue to qualify for relief as plant or machinery and will not be taken into account for the SBA.

    On the whole we see the introduction of SBAs as a very positive step, but the proposed application of the proposals will require further scrutiny. Indeed, the Government intends to consult on the details of how the legislation will be applied and has asked for views on specific aspects of the SBA.

    Reduction in writing down allowances (WDA)

    The rate of WDA will be reduced from 8% to 6% for expenditure incurred on the special rate pool of plant and machinery. Special rate expenditure includes expenditure on long-life assets, thermal insulation, integral features and expenditure incurred on or after 1 April 2018 on cars with CO2 emissions of more than 110 grams per kilometre driven.

    This measure does not change the writing down allowance on the main pool which is currently 18%, nor does it change the writing down allowance on the special rate pool for ring fence trades which is currently 10%.

    The new rate will be effective from:

    • 1 April 2019 for businesses within the charge to Corporation Tax
    • 6 April 2019 for businesses within the charge to Income Tax

    For businesses whose chargeable period spans 1 April (Corporation Tax) or 6 April (Income Tax), a hybrid rate will have effect for unrelieved expenditure in the special rate pool.

    The hybrid rate will be based on the proportion of a chargeable period falling before the change date and the corresponding proportion falling after the change date.

    Enhanced Capital Allowances (ECAs)

    From April 2020 the government will end ECAs and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List. The Government contends that ECAs add unnecessary complexity to the tax system and believes there are more effective ways to support energy efficiency. This is disappointing, and we await to see what alternative measures are introduced.

    On Enhanced Capital Allowances (ECAs) for electric vehicle charge points it was announced that the Government will extend the ECA for companies investing in electric vehicle charge points to 31 March 2023.