Earlier this year, the Chancellor’s Spring Budget confirmed the removal of the temporary super-deduction allowance and the introduction of a new capital allowance regime to boost economic investment and business growth across the country.
What is meant by ‘capital allowance’?
A capital allowance is a type of tax relief for a business. These government allowances are in place to allow businesses to deduct the costs of certain capital expenditures against their taxable profits, in turn, lowering their overall expenses. Specific capital assets, such as plant and machinery, are usually eligible for these allowances.
The Capital Allowances Act of 2001 states that an asset qualifies for capital allowance if it is likely to last for two years or longer and has a clear purpose in facilitating the operation of the business.
What does the new regime look like?
The new budget introduced an effective £9 billion a year corporation tax cut for UK businesses. The standard corporation tax rate has risen from 19% to 25% for companies with taxable profits exceeding £250,000. This means that since April if a company is paying the new rate of 25% they will be saving 25p for every £1 spent.
Two major capital allowances with a combined value of £27 billion were also announced, and a previous allowance has been made permanent.
1. Full expensing (FE)
One of the most noteworthy changes announced was the introduction of the ‘full expensing’ allowance. This is the replacement for super-deduction and permits businesses to claim 100% of the cost of capital expenditure against profits for the financial period. There is no limit to the amount that can qualify for this allowance.
Only purchases that qualify as ‘main pool’ capital assets, such as vans, trucks, IT equipment and office furniture are eligible for this allowance.
How long is it effective?
The government has introduced full expensing for a three-year period. This measure is in place between 1st April 2023 and 31st March 2026 with the intention for it to be made a permanent allowance.
2. 50% first-year allowance (FYA)
Plant and machinery that is categorised as a ‘special rate’ asset is subject to the 50% first-year allowance. Solar panels, air conditioning, heating, and lighting are all examples of ‘special rate’ assets.
Businesses can use the 50% first-year allowance to write off half the cost of these assets from their profits before taxes. The remaining balance goes into the regular special rate pool to be written off at the customary 6% rate in future years.
How long is it effective?
This allowance was initially introduced back in 2021 alongside the super-deduction but has now been extended for another three years until 31st March 2026. Like the FE allowance, there is an intention for FYA to be made permanent.
3. Annual Investment Allowance (AIA)
In his autumn statement last year, the chancellor announced that the Annual Investment Allowance (AIA) would be set at £1 million per annum on a permanent basis from 1st April 2023.
The AIA provides 100% tax relief on expenditures from profits before tax. All businesses, including unincorporated companies and the majority of partnerships, are eligible for this allowance. It applies to both the main pool and special rate assets.
Any one of these capital allowances may be claimed on your yearly tax return, whether it be your self-assessment return if you are a sole trader or your corporation tax return if you are a limited company.