Capital allowances can lower barriers to investment

14 July 2023

Owner-managed businesses face twin threats to their cashflow in the form of rising interest rates and rising taxes. Alongside the recent increase in the Bank of England base rate to 5%, 1 April saw the main rate of corporation tax increase from 19% to 25%.  

A challenging environment for investment

A combination of increased costs of funding and reduced levels of post-tax profit presents a challenge to the viability of investment plans that many businesses might see as a route to growth. In order to address this, the government introduced very attractive changes to the capital allowances regime in the Spring Budget. Capital allowances provide relief for certain types of capital expenditure – reducing taxable profits and thereby reducing tax liabilities.  

Incentives for companies

Typically, capital allowances give tax relief over a number of years – intended to reflect the fact that the underlying assets may be expected to have a useful life of several years. The Budget announcements are aimed at giving an accelerated rate of relief, to incentivise investment in plant and machinery by businesses.

The recent changes, known as ‘full-expensing’, provide a year one tax deduction of either 50% or 100% of qualifying cost, depending on the nature of the asset acquired. Based on a notional £1m of spend, this could reduce a company’s corporation tax liability by £250,000. This relief is due to last for three years, from 1 April 2023 to 31 March 2026.

The full expensing regime is only available to companies and applies to expenditure on new and unused assets.  

Incentives for other businesses

The Spring Budget also brought some welcome news for expenditure that will not qualify for full expensing – for example, expenditure on second-hand assets or expenditure by unincorporated businesses. The limit for expenditure qualifying for the annual investment allowance (AIA), which allows all types of business to claim a 100% tax deduction in year one on qualifying expenditure, has been set permanently at a level of £1m. This follows a number of years of uncertainty during which the annual limit has either varied or been set at a temporary level.

Plan for the future

Businesses anticipating significant capital investment in the short or medium term should factor the value of available tax incentives, such as full expensing and the annual investment allowance, into their business plans. These incentives may reduce the need for external financing by reducing the cashflow impact of tax payments.  

For more information, please get in touch with Rupert Guppy or your usual RSM contact.