The Chancellor announced a number of significant changes to the capital allowance system in his 2021 budget:
Companies (but not partnerships, LLPs or sole traders) investing in qualifying plant and machinery between 1 April 2021 and 31 March 2023 will benefit from new enhanced first-year capital allowances.
Investments in assets which qualify for the main rate of allowances (currently 18% writing down allowances) will get a 130% super-deduction. This means that a £100,000 machine where tax relief would have been £19,000 (assuming Annual Investment Allowances (AIA) are available, but just £3,420 if not) will now give tax relief of £24,700.
Assets qualifying for the lower special rate relief (currently 6% writing down allowances) will benefit from a 50% first-year allowance. This means that a qualifying spend of £100,000 on these assets will now give tax relief of £9,500 whereas previously it was £1,140. This ignores the impact of AIAs as the interaction of the two reliefs is not clear in the guidance to date.
There will be certain exclusions, for example second hand assets or assets acquired under a contract entered into before 3 March 2021. There will also be additional conditions to qualify for the enhanced allowances for assets acquired under hire purchase agreements. Balancing adjustments can clawback allowances on disposal of the assets.
The new rules will include anti-avoidance measures to counteract artificial arrangements or connected party transactions which lack commercial substance.
It is interesting to note that the enhanced allowances are due to finish before the corporation tax increases apply from 2023.
Do note the terminology used is companies and not businesses, the draft legislation clearly states “a company within the charge of corporation tax”.
Professional firms (and other businesses) trading as partnerships, LLPs and self-employed businesses are being excluded from these new temporary capital allowances.
These firms will no doubt be looking to be make investment in redesigning office floor plates for COVID-19 safe social distancing and investing yet further in their technology hardware and software and increased capital allowances will not be available to them.
As already announced the temporary £1,000,000 limit for the AIA will be extended by one year, covering 1 January 2021 to 31 December 2021.
The annual investment allowance gives an immediate tax deduction of 100% for qualifying expenditure up to £1m.
Enhances capital allowances were also announced for qualifying expenditure in Freeport’s. Please see our Freeport’s page for further details.