Chancellor Rishi Sunak announced a package of capital allowances measures in the budget designed to stimulate business investment as part of the economic recovery following the coronavirus pandemic. This included a two year ‘super-deduction’ of up to 130 per cent of qualifying main pool expenditure, temporary first-year allowances for special rate plant and machinery, and accelerated relief for expenditure in new designated freeport areas.
Most of these measures are aimed specifically at companies, with other businesses (sole traders, partnerships, LLPs) being largely restricted to the current capital allowances regime. There are a number of other exclusions that may apply, including for businesses that buy plant and machinery for the purposes of leasing and for those carrying on ‘ring fence’ oil or gas-related activities.
Most companies investing in new main pool plant and machinery between 1 April 2021 and 31 March 2023 will be able to claim tax relief of 130 per cent of the cost in the year in which the relevant expenditure is incurred (though the rate may reduce to between 100 per cent and 130 per cent if the relevant accounting period straddles 31 March 2023). This compares with the current 18 per cent reducing balance writing down allowance for main pool expenditure that is not covered by the annual investment allowance (AIA), and is a welcome measure to encourage capital expenditure.
For investments in new assets that qualify for the special rate pool, principally integral features in buildings and long-life assets, a temporary first year allowance of 50 per cent will be available over the same period (which compares with the current rate of 6 per cent per annum reducing balance).
Freeports will also benefit from a bespoke capital allowances regime. Construction or renovation of a commercial building inside a freeport area will attract a structures and buildings allowance of 10 per cent per year (compared to 3 per cent outside freeports). Plant and machinery (whether main pool or special rate) acquired by companies for use in freeports will attract immediate tax relief in full via a 100 per cent first year allowance.
Those businesses with planned capital expenditure over the next two years will likely benefit from an acceleration in the tax relief available. Expenditure that involves building works will likely attract relief at differing rates – so ensuring expenditure is correctly allocated will be vital to ensure the most advantageous outcome. However, provisions have been included within the draft legislation to prevent relief being given on contracts already entered into.
For any projects planned in freeport areas, the vast majority of the capital expenditure will get tax relief within 10 years, with only certain land-related costs being excluded.
Those businesses with regular capital expenditure or that are considering new capital projects should focus on capturing the maximum level of tax relief in the shortest possible time. This can be achieved through careful consideration of the tax benefits at the outset of any planned investment. This also applies to unincorporated businesses that may see this new package of measures as an incentive to adopt a corporate vehicle for any new projects.
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