Capital allowances are the means UK businesses (companies, partnerships and individuals) obtain tax relief for capital expenditure on things like buildings, plant, machinery and related equipment. Not all expenditure qualifies for allowances and what does can attract vastly different rates of relief (3% to 130%). There are also special reliefs for brownfield regeneration (up to 150% allowance or 16% tax credit).
Businesses (including individuals) that claim the allowances are entitled to offset them against taxable profits that are subject to corporation (19%*) or income tax (up to 45%**). Some allowances are given in full in Year 1 (and occasionally enhanced - up to 150%) whereas others can be spread over a number of years (up to 33 1/3).
This is how it works:
A company that spends £100,000 on assets eligible for the 130% super deduction for qualifying plant and machinery should be entitled to deduct £130,000 (130%) from its taxable profits which at 19% would save them £24,700.
If the company spends £100,000 on assets that are only eligible for 3% (Structures and Building Allowances) it will only be entitled to deduct up to £3,000 in Year 1 (saving tax of £570) with the balance spread over 33 1/3 years (and saving tax at the prevailing CT rate).
If the company spends £100,000 on assets that are not eligible for capital allowances such as land, landscaping and most statutory fees it receives no deduction from its corporation tax liability.
* The main corporation tax (CT) is forecast to increase to 25% from April 2023
** In Scotland the upper tax rate is 46%
The average £250,000 commercial office fit-out contains expenditure that is 79% (£197,500) eligible for plant and machinery allowances (44% for the new 130% Super Deduction and 35% for the 100% Annual Investment Allowance) which can generate a Year 1 tax saving of £43,795 (based on a corporation tax rate of 19%) - how would a saving of 17.5% affect your project plans?
Super Deduction Incentive (130%)
The Super Deduction was introduced from 1 April 2021 to 31 March 2023 and is available to companies (not individuals) who invest in certain types of plant and machinery such as:
Instead of the standard writing down rate of 18% per annum which writes off the expenditure over a number of years (63% by Year 5 and 86% by Year 10), companies can claim a 130% year 1 allowance generating a significantly enhanced benefit and timing advantage.
Businesses that are not subject to corporation tax are limited to the standard rate or Annual Investment Allowance described below.
Annual Investment Allowance (100%)
The Annual Investment Allowance (AIA) enables a much wider classification of plant and machinery (including expenditure eligible for the Super Deduction) to be written off in full in Year 1 up to the current limit of £1 million (due to expire on 31 March 2023).
The above illustrates examples of 'integral feature' (special rate pool) plant and machinery which can attract a First Year Allowance (FYA) of 50% (in line with the Super Deduction incentive) if the company is unable to utilise its AIA. Without these timing incentives most of this expenditure would only qualify for the much lower writing down rate of 6% per annum (27% by Year 5 and 46% by Year 10).
Structures and Buildings Allowances (3%)
Structures and Building Allowances (SBAs) allow businesses (companies and individuals) who incur expenditure on buildings and structures to claim a 3% annual allowance for the works involved up to a period of 33 1/3 years (or until the asset is demolished or ceased to being owned).
Older buildings that contain hazardous or dangerous materials such as asbestos or spillage from an industrial activity may have remediation or mitigation expenditure that is eligible for contaminated land remediation relief (up to a 150% deduction or 16% tax credit).
Businesses that intend to use the property for research and development may be eligible to claim a 100% allowance for the parts of the building, plant and machinery involved instead of the normal allowances available.
Buildings or structures in Freeport Tax sites can qualify for Enhanced Capital Allowances for plant and machinery (up to 100% Year 1 allowance) and Enhanced Structures and Building Allowances (10% instead of 3%).