A deep dive into the changes to Capital Allowances this spring

This year’s Spring Budget confirmed a few changes to Capital Allowances, from the introduction of Full Expensing to the solidifying of the Annual Investment Allowance.

Here’s a deeper look at the changes to Capital Allowances that have now come into effect, and the impact this will have on businesses.

1) Farewell to the Super-Deduction…

The Super-Deduction was introduced as a reaction to the pandemic to allow tax relief for companies of 130% on the cost of qualifying Main Rate plant & machinery investments made between 1 April 2021 and 31 March 2023.

It was hoped that the qualifying period for this generous tax relief would be extended, but instead it has been withdrawn as originally planned.

This decision may be due to the reintroduction of the Main Rate of Corporation Tax, where some companies will now pay tax at 25%. This means there is potentially no loss of benefit, as 130% tax relief at a Corporation Tax rate of 19% is essentially the same as a 100% tax relief at a Corporation Tax rate of 25%.

2) …and hello to Full Expensing

The Chancellor has introduced Full Expensing, which offers a 100% first-year allowance to companies on new and unused qualifying Main Rate plant & machinery investments. This applies from 1 April 2023 to 31 March 2026, although there is already talk of this becoming a permanent allowance.

Full Expensing bears a striking resemblance to the Annual Investment Allowance (AIA), but there are some significant differences.

Unlike AIA, there is no upper limit to the amount of qualifying costs that can be fully expensed. It is also only available on new and unused qualifying plant & machinery that would normally qualify for the Main Rate Pool and is not available to Income Taxpayers like sole traders and partnerships.

3) Extension to the 50% first-year allowance

The 50% first-year allowance, which is available on new and unused Special Rate plant & machinery, was first introduced alongside the Super-Deduction in 2021, and was due to be withdrawn in March 2023.

However, this has been extended until 31 March 2026, and will run alongside Full Expensing, with a similar expectation that it too could become a permanent allowance.

This allowance also offers an uncapped limit on new and unused qualifying Special Rate expenditure incurred by companies, with the balance added to the pool and written down in future accounting periods. It is understood that AIA is unavailable on this balance.

4) No more ‘yo-yoing’ of AIA

Annual Investment Allowance is known by some as the ‘yo-yo tax’ because of the rise and fall in levels since it was originally introduced in 2008. However, the string appears to have been cut, with the long-awaited confirmation that AIA will remain permanently at £1 million.

This is a welcome announcement, especially as it is a far cry from the days it was as low as £25,000.

The transitional rules applying to chargeable periods straddling 1 April 2023 will also be repealed. Originally it was mooted that the rules would still apply following the change from temporary to permanent, even though the level of AIA has not changed. This would have meant AIA would be apportioned between the two periods straddling 1 April 2023. Thankfully, common sense prevailed, and no apportionment is required.

5. Charge-point extension

There has been an extension of two years for 100% first-year allowance on electric vehicle charging points. This takes us to 31 March 2025 for Corporation Taxpayers and 5 April 2025 for Income Taxpayers.

Not all businesses to benefit

The announcement of Full Expensing looks like good news on the face of it, but when you take a deeper dive and consider the £1 million AIA being made permanent, it will only really benefit a small number of larger businesses.

As relief is offered at 100% of the cost (as opposed to the 130% available with Super-Deduction) a company would have to make over £1 million of plant & machinery investment annually to exceed the AIA limit (also offering relief at 100% of the cost) and fall into the realms of Full Expensing. The reality is that most Corporation Taxpayers will not come anywhere near this threshold.

Similarly, with the 50% first-year allowance, a company would have to exhaust their £1 million AIA with Special Rate Pool expenditure (assuming all Main Rate plant & machinery would take advantage of Full Expensing) before even considering this form of tax relief, which forces the 50% balance to be claimed at 6% WDA in future tax years.

It’s a shame it does not have a wider reach to more companies, especially those impacted most by the pandemic, as the changes coming into effect now are largely positive. It is an improvement though for the highly profitable large UK companies who will see the benefit.

Mark Anthistle is a Senior Capital Allowances Analyst at innovation funding specialist Catax (a Ryan company). He can be contacted at Mark.Anthistle@catax.com