16.5.23 | Tax

Capital allowances explained

The super-deduction has come to an end. Andrew Diver, Head of Taxation at Beatons, looks at what other capital allowances are available to companies. 

Aimed at driving growth in the UK economy, the super-deduction was introduced in April 2021 as a form of tax relief – allowing companies to claim a 130% capital allowance deduction.

Hailed “the biggest two-year business tax cut in modern British history”, the aim was to encourage companies to make additional investments and to bring planned investment forward as the UK recovered from the pandemic. But, actually, it was more a system to prevent businesses from deferring expenditure until the main rate of corporation tax rate increased from 19% to 25%.

The new capital allowances offer

As the scheme wrapped up on March 31, it’s time for businesses to look again at what expenditure will now qualify for relief.

Measures announced in this year’s Spring Budget set out the ways businesses can benefit, and cut their taxes, in the wake of the super-deduction’s demise.

Announcements included full expensing and annual investment allowances – both of which are aimed at encouraging companies to invest and boost economic growth.

Full expensing

To encourage UK companies to invest in more modern equipment, full expensing was introduced, offering 100% first-year relief to businesses on qualifying new main rate plant and machinery investments from April 1, 2023, until March 31, 2026.

Full expensing aims to build on the success of the super-deduction, allowing companies to write off 100% of the cost of investment in one go.

So how does full expensing work?

  • The main expenditure must be incurred on the provision of “main rate” plant or machinery on or after April 1, 2023, but before April 1, 2026.
  • The plant and machinery must be new and unused, must not be a car, given to the company as a gift, or bought to lease to someone else.
  • Full expensing is available to companies subject to Corporation Tax only. Unincorporated businesses cannot claim but are entitled to claim the AIA, which offers the same benefits as full expensing for the investments it covers.
  • For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing.

Special rate expenditure is generally parts of a building deemed integral, items with long life, solar panels, thermal insulation added to a structure and cars with CO2 emissions above a certain threshold.

Annual investment allowances

Full expensing is available alongside the ongoing Annual Investment Allowance (AIA), which allows you to claim up to £ 1 million on assets that are not new and do not qualify for full expensing.

The AIA was introduced in April 2008, allowing most businesses, regardless of their size, a 100% capital allowance for qualifying expenditure on plant and machinery.

The legislation was introduced in the Spring Finance Bill 2023 to increase the permanent AIA level to £1,000,000 – but as the AIA amount has changed several times since its introduction in April 2008, you will need to adjust the amount you claim according to what the amount was in the period you’re claiming for.

Note that you cannot claim AIA on business cars, items you owned for another reason before you started using them in your business, or items given to you or your business.

Capital allowances on cars

Capital allowances can be claimed on the purchase of a car; however, it depends on the car’s CO2 emissions and whether it was bought new or second-hand.

  • A new electric vehicle with 0% CO2 emissions – 100% first-year allowance
  • A second-hand electric vehicle or car with CO2 emissions under 50g/km – main rate allowances 18%/p.a
  • New or second-hand vehicles with CO2 emissions above 50g/km – special rate pool of 6% allowance per year

Capital allowances in Freeports

Finally, it is worth checking if you can claim enhanced capital allowance relief in UK Freeport tax sites.

A Freeport tax site is an area of land where businesses can claim certain tax reliefs, meaning they are special areas within the UK’s borders where different economic regulations apply.

The biggest saving is in the Structures and Buildings Allowance (SBA) that can be claimed in a Freeport is 10%, compared to just 3% outside a Freeport. For example, the full cost of new premises built in a Freeport would be tax deducted in 10 years as opposed to 33.3 years outside of a Freeport.

The capital allowances on plant and machinery for use in a Freeport are also enhanced. The qualifying assets used in a Freeport are entitled to 100% allowances, regardless of whether they would have fallen within the special rate pool or the main pool of expenditure.

The relief can be claimed for expenditures incurred from the date a Freeport tax site is designated until September 30, 2026.

If you need support, please email the expert team at Beatons e: info@beatons.co.uk or t: 01473 659777.