In the current, high inflation environment with increasing tax rates, escalating machinery costs and a squeeze on profitability, it is more important than ever to maximise the amount tax relief available on the purchase of new equipment.
Capital Allowances are generally available on the purchase of new, qualifying equipment. The Capital Allowances regime undergoes almost annual changes to the rates, types of relief available and nature of qualifying equipment. This was the case in the most recent March Budget where the Chancellor announced a new ‘full expensing’ regime to apply to companies from 1 April 2023.
Summarised below are the allowances which are available to businesses from 1 April 2023
Full Expensing (companies only)
The full expensing regime replaced the temporary super deduction allowances which were available to companies up to 31 March 2023. Under full expensing, companies are able to obtain a 100% year-one deduction on the cost of any new plant and machinery acquired in the period from April 2023 to March 2026, excluding cars. This is regardless of whether the company spends £50,000 or £50 million in that period. With the increase in Corporation Tax rates to 25%, this relief can be incredibly valuable to companies who have high capital expenditure costs. However, with the current £1 million level of Annual Investment Allowance (see below), this full expensing will only have real benefit to those businesses spending more than £1 million per year on capital items.
As well as the 100% rate for plant and machinery assets, under full expensing ‘special rate’ assets, such as electrical, heating and water systems, will benefit from a 50% first year allowance. This could be of great benefit to companies who are expanding their business premises or acquiring new buildings.
One further point to note is that when an asset is sold and full expensing has been claimed previously, the amount of the disposal proceeds is brought into charge to Corporation Tax in full. Under previous regimes the proceeds would have been deducted from the Capital Allowance pool balance and not charged to Corporation Tax in many cases. This could therefore bring forward tax charges for businesses who regularly replace capital assets.
Annual Investment Allowance (AIA)
This 100% relief has been in place now since 2008 and in that time the amount of the allowance has yo-yoed between £25,000 and £1 million. The £1 million figure is now a ‘permanent’ figure for the foreseeable future (or until we have a change of government!).
Annual Investment Allowance is available to all businesses including sole traders, partnerships, LLPs and companies, however, as has been the case for a number of years, it is not available to partnerships where any member is either a company or trust. The Annual Investment Allowance is also split between businesses controlled by the same person.
The allowance can be used to provide 100% relief on expenditure relating to any item of plant and machinery (except cars) as well as special rate items. Unlike with full expensing, the assets acquired do not have to be new and unused and given the high level of the allowance, this will more than cover all qualifying capital additions in any given year.
Structures and Buildings Allowance (SBA)
Expenditure on new buildings and structures does not qualify for either full expensing or the Annual Investment Allowance. Instead, costs incurred on the structure of a building or other items such as fencing, bridges and tunnels can qualify for an annual Structures and Buildings Allowance at a rate of 3%. Broadly, this allowance is available to any type of business.
Repairs v Capital
While Capital Allowances are a very valuable source of tax relief for businesses, generally they are not applicable to expenditure on residential properties unless they are qualifying furnished holiday let properties or properties which are solely used by employees (such as farm workers’ accommodation).
With the upcoming Energy Performance Certificate (EPC) regulation changes for let properties, a large number of businesses who have some rental properties are having to incur significant amounts of expenditure to bring such properties up to an EPC rating of at least ‘C’. Given that is it likely that the vast majority of these properties will not benefit from Capital Allowances, it is necessary to consider what element of the works can be classed as repairs and what constitutes capital improvement.
HMRC’s view is that a repair is classified where alterations are made to properties which is merely replacing part of the property with its modern equivalent. So, for example, replacing old, single glazed wooden windows with modern, energy efficient, double glazed PVC windows is likely to qualify as a repair with full tax relief being given in the year of expenditure.
However, where the works offer some kind of appreciable improvement to the property, this will be classed as capital expenditure with no tax relief available until the property is sold. This includes adding insulation where none existed previously.
As with all significant expenditure, it is vital that specialist advice is sought as early as possible so that any planning can be undertaken before it is too late.
If you would like to get in touch to discuss the tax reliefs available to you, whether you are investing in machinery or buildings, please speak to Chris George, by emailing firstname.lastname@example.org or calling 0330 058 6559.