20 Aug 2022
In his March 2021 Spring Budget, then Chancellor of the Exchequer Rishi Sunak introduced the capital allowances ‘super-deduction’ and a 50 per cent first year allowance for qualifying ‘special rate’ assets - temporary incentives to encourage capital investment by companies as part of efforts to stimulate renewed UK business activity after the coronavirus pandemic restrictions. These reliefs are potentially highly valuable to the renewables sector, but as we discuss in more detail below, structural issues may limit their effectiveness in incentivising major capital investment in this area, and there are lessons that can be learned as part of the Government’s ongoing review of the capital allowances regime.
As a reminder, the super-deduction provides companies with a 130 per cent first year allowance on qualifying main pool plant and machinery expenditure incurred between 1 April 2021 and 31 March 2023 (compared with a standard 18 per cent annual writing down allowance), thereby potentially reducing a company’s corporation tax liability by 24.7p per £1 of qualifying expenditure (based on the prevailing 19 per cent corporation tax rate). The special rate allowance provides a 50 per cent first year allowance on qualifying special rate pool expenditure (compared with the standard 6 per cent annual writing down allowance, which is still available thereafter on the remaining unrelieved expenditure).
Super-deduction – the good and not quite so good
The super-deduction provides a very welcome ‘30 per cent kicker’ over and above the 100 per cent relief for qualifying expenditure and is therefore more than just a timing benefit.
Notwithstanding the absolute tax benefit provided by this uplift, perhaps the key attribute of the super-deduction is that it is uncapped, meaning there is no upper limit on claims by the same business. Given the intensity of capital expenditure in the renewables sector, the tax benefit this can provide is quite startling – a £10m investment in main pool assets realises a potentially game-changing level of year one tax relief, shifting the dial from a maximum year one cash tax saving of £497,800 to a maximum of £2,470,000. Some of this additional relief would unwind over time, but an absolute saving of £570,000 would be realised as a consequence of the 30 per cent uplift.
After accentuating the positives, for balance there are of course a couple of pitfalls to bear in mind. The most notable of these is that the super-deduction is a temporary relief, available for only 24 months. Major capital investment projects often have a long lead time, and therefore an element of luck may play a part in whether or not the timing of expenditure falls within the short window the super-deduction is available. Secondly, should there be a disposal of the asset, a balancing charge (clawback) may arise in the chargeable period the asset is disposed of, which may include the 30 per cent uplift, or an element of it, if the asset is disposed in an accounting period beginning before 1 April 2023.
What next for capital expenditure reliefs?
In view of the scheduled end, on 31 March 2023, of the period in which the super-deduction can be claimed, HM Treasury published a policy paper in May 2022, inviting views, during a brief consultation period, on a range of options for general reform of the UK capital allowances regime.
The paper focuses on the need for reform to the capital allowances regime to ensure not only that UK businesses are incentivised to be bold and commit to capital investment, but also that the regime is attractive and competitive internationally to attract inward investment into the UK.
A number of potential options are identified, including a new regime of first-year allowances, increased annual writing down allowances rates, and even full expensing. The Government is expected to announce its next steps, in response to the views received from stakeholders, in the next Budget statement, anticipated in the autumn of this year.
The importance of capital allowances in successful renewables sector projects should not be understated and should be a key plank of any significant investment appraisal. With projects typically being capital intensive (think energy from waste, battery storage, hydrogen, wind farm projects etc) and often consisting to a substantial extent of expenditure that qualifies for tax relief, capital allowances play a critical role in assessing cash flows, returns on investment, and sometimes even project affordability.
Although the relief will have been gratefully received by those businesses that can benefit, the two-year ‘blink and you’ll miss it’ super-deduction window has been, in our view, much too short. A clear road map for the capital allowances regime for at least the next five years is critical to providing businesses with confidence in the level and timing of the tax relief that will be available for capital expenditure, which is key when planning for major renewables projects.
In addition, the re-introduction of additional incentives for ‘green’ investment, such as more generous first year allowances for such expenditure, could be a significant boon for renewables projects – both supporting investment and aligning the capital allowances regime more closely with the Government’s Net Zero Strategy.
The renewables sector can be encouraged that the Government recognises the need for a regime that incentivises UK business and is currently looking at ways to improve and modernise it.
For more information, please get in touch with Paul Smith or your usual RSM contact.