Are you thinking of investing in new plant or other equipment? Remember that the super-deduction offering 130% first-year tax relief is available to companies until March 2023.

The super-deduction tax break was introduced on 1 April 2021 and allows companies to deduct 130% of the cost of any qualifying investment on most new plant and equipment that would ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 a business invests they can reduce their tax bill by up to 25p. The temporary tax relief applies on qualifying capital asset investments until 31 March 2023. 

The super-deduction is designed to help companies finance expansion in the wake of the coronavirus pandemic and help to drive growth. 

In addition, an enhanced first year allowance of 50% on qualifying special rate assets has also been introduced for expenditure within the same period. This includes most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. 

The measures have effect in relation to qualifying expenditure from 1 April 2021, and exclude expenditure incurred on contracts entered into prior to Budget Day, 3 March 2021.

Capital Allowances are the deductions which allow businesses to secure tax relief for certain capital expenditure. Capital Allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable to Corporation Tax.

The Capital Allowance legislation does not specifically define plant and machinery (P&M). However, there is legislation that makes it clear that most buildings, parts of buildings and structures are not P&M. 

An interesting case dating back to 1982 helps to confirm this point of view. The decided case concerns a company that spent money on décor items such as light fittings and wiring as well as decorative items such as wall plaques, tapestries, murals, prints and sculptures. It was accepted that electric wiring was part of the fabric of the building but not the other decorative assets. 

HMRC’s internal guidance states that inspectors should only accept that items of decor are plant if the taxpayer can show that:

• the trade involves the creation of atmosphere/ambience and in effect the sale of that ambience to its customers; and
• the items on which plant or machinery allowances are claimed were specially chosen to create the atmosphere that the taxpayer is trying to sell.

For example, a painting on an accountant’s office wall that is owned by the accountant is not plant because selling atmosphere is not part of an accountant’s business.

There are special rules that must be followed when you sell an asset on which capital allowances have been claimed. Capital allowances is the term used to describe the tax relief businesses can claim on certain capital expenditure and thereby reduce the amount of taxable profits.

The sales value is usually the sales price. If you gave the asset away, stopped using the asset or sold it for less than it was worth then the market value should be used.

If you originally claimed 100% tax relief on the item, the business is required to add back the difference to their taxable profits. This is known as a balancing charge. A balancing charge is effectively a way of ensuring that a business does not claim more tax relief than they were entitled to on the purchase of a business asset. The balancing charge works in the opposite way to a capital allowance and increases the amount of profit on which tax is due.

If you originally used writing down allowances, you may have a balancing allowance or a balancing charge.

There are special rules for dealing with any balancing charges or balancing allowances where a business ceases to trade.

Designed to help offset the increased Corporation Tax main rate and promote investment, the Chancellor announced the introduction of a new ground breaking super-deduction tax relief. The new temporary tax relief applies on qualifying capital asset investments and will apply from 1 April 2021 until 31 March 2023. The new super-deduction is designed to help companies finance expansion in the wake of the coronavirus pandemic and help to drive growth. 

The measure will apply to qualifying expenditures as follows:

• a super-deduction providing allowances of 130% of most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
• a first year allowance of 50% will apply to most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances

The measure will apply to qualifying expenditure from 1 April 2021 and will exclude expenditures incurred on contracts entered into prior to Budget day, 3 March 2021. Certain expenditures will be excluded. 

The government had also previously announced that the temporary Annual Investment Allowance (AIA) cap would be extended for a further 12 months. The AIA allows for a 100% tax deduction on qualifying expenditure on plant and equipment. The temporary limit of £1 million will remain in place until 31 December 2021 before reverting to the usual £200,000 limit.

The Chancellor’s announcement of a temporary five-fold increase in the Annual Investment Allowance (AIA) will be welcomed by many small and medium sized businesses looking to incur significant capital expenditure on plant and machinery.

The Annual Investment Allowance (AIA) was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. The announcement by the Chancellor provides for a temporary increase in the allowance to £1 million for a 2 year period from 1 January 2019 to 31 December 2020.

The AIA allows for 100% first year tax relief for qualifying expenditure on plant and machinery. It can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Partnerships or trusts with individuals and companies in the business structure do not qualify for the AIA. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

Businesses thinking of incurring large items of capital expenditure over the coming months should ensure that any purchase is properly timed to take full advantage of the temporary increase in the AIA limit.