What the mini-Budget means for business tax

Capital Allowances formed the backbone of post-pandemic business incentives last year as the Government looked to grow the economy through investment in productivity-enhancing plant and machinery.

The Super Deduction, introduced in April 2021, provided a generous and unprecedented 130% first-year allowance on qualifying plant and machinery.

But that relief is due to end in March 2023 and, in recent months, the focus has turned to what, if anything, its replacement would be. 

As it turns out, we’ve not had to wait long, as the ‘mini-Budget’ from new Chancellor Kwasi Kwarteng brought yet more changes to the Capital Allowances landscape. 

The background

The Government recognised that, once the Super Deduction ended, the UK’s Capital Allowances regime would be less generous than average when compared with other OECD countries1. 

At the last Spring Statement, it outlined a number of suggestions to strengthen the reliefs on offer, one of which was to increase the permanent level of the Annual Investment Allowance (AIA). This has turned out to be the first lever the Government has pulled in response to winding down the Super Deduction. 

AIA reversal

The current AIA, which is set at £1m, was due to expire on 31 March 2023 and return to £200,000. This decision has been reversed and means businesses can continue to deduct 100% of the cost of qualifying plant and machinery up to £1m in the first year. 

When the various options for Capital Allowance reforms were mooted in the Spring Statement earlier in the year, this appeared to be the best incentive for encouraging growth — and many businesses will be thrilled by this announcement. 

The current AIA has enabled many clients to effectively receive a quick cash injection for their businesses, making capital expenditure more affordable and allowing them to reinvest the relief.

New Investment Zones

One brand new reform from the Chancellor is more generous Capital Allowance relief, which will become available in up to 40 newly-created Investment Zones. 

Firms based in these zones will be able to claim relief of 100% on plant and machinery in the first year, regardless of the AIA cap. 

Other benefits will include 100% business rates relief on newly occupied and expanded premises, no Stamp Duty Land Tax for land and buildings bought for use or development for commercial purposes, and for purchases of land or buildings for residential developers, no National Insurance Contributions for new employees earnings up to £50,270 per year working in the tax site for at least 60% of their time, and an improved 20% Structures and Buildings Allowance relief.

This long list of incentives will surely encourage businesses to consider moving into these zones, and it will be interesting to see how quickly these take shape.

More scope for reform

The AIA announcement is significant, and will help to promote a new culture of growth. Further reforms could follow as Capital Allowances are still clearly high on the agenda for HM Treasury. 

A number of other options had also been aired in the Spring Statement, including establishing a First Year Allowance (FYA) for main and special rate assets, or introducing full expensing to allow businesses to write off the costs of qualifying investment in one go. Other suggestions included increasing writing down allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8%.

Now we wait to see if the latest changes are just the beginning.

Dean Needham is a Capital Allowances Technical Team Manager at innovation funding specialist Catax. He can be contacted at Dean.Needham@catax.com