Updated: Apr 25, 2022
Our working arrangements and office environments are changing; as is what we expect from the spaces we utilise for developing business ideas and human interaction. Creating great office accommodation costs but perhaps not as much as you think when you factor in the current tax allowances available to most UK tax paying businesses - how would an effective 17.5% cash saving affect your project plans?
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%).
Structures and Building Allowances can also be available for most of the balance which provides for an annual allowance of 3% (£1,575 per annum) as long as the business owns and uses the property thereby generating a further annual tax savings (£299 assuming a corporation tax rate of 19%).
Super Deduction Incentive
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
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 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 Building Allowances
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).
Only the actual building or structural element can qualify for SBAs, for example, qualifying plant and machinery (such as kitchen, heating, lighting and bathroom furniture) that is installed so as to become a fixture in land law cannot qualify for SBAs and must be excluded from any claim along with landscaping, land reclamation, land remediation and most statutory fees.
Other Notable Incentives
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%).
This year's Spring Statement trailed the government's intention to make further changes to the tax system to encourage ongoing investment once the Super Deduction and £1 million AIA come to an end. These changes are intended to coincide with an increase in the corporation tax rate from 19% to 25% (for profits over £250,000).
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