Capital allowances allow businesses to write off the cost of qualifying assets against taxable income, therefore reducing their tax liability. Most businesses will depreciate their assets in their accounts, but since businesses will use different rates and depreciation periods, these adjustments are not suitable for applying consistent taxation across businesses. Therefore, any depreciation adjustments businesses make are added back in before calculating taxable profit and then capital allowances are applied instead. Read our latest article below to find out the latest updates to capital allowances...
What are capital allowances?
Capital allowances allow businesses to write off the cost of qualifying assets against taxable income, therefore reducing their tax liability. Most businesses will depreciate their assets in their accounts, but since businesses will use different rates and depreciation periods, these adjustments are not suitable for applying consistent taxation across businesses. Therefore, any depreciation adjustments businesses make are added back in before calculating taxable profit and then capital allowances are applied instead.
The new 'super deduction' scheme
HMRC has introduced a new 130% first year capital allowance for qualifying plant and machinery assets with effect from 1st April 2021 and until 31st March 2023. As part of the 'super deduction', as HMRC terms it, there is also a 50% first year allowance for qualifying special rate assets. The super deduction capital allowances are only available for companies, not sole traders or partnerships, but will allow a saving in tax of up to 25p per £1 invested, which makes the UK’s capital allowances scheme one of the best in the world.
It is hoped that the super deduction will encourage businesses to invest in new and efficient plant and machinery to help them grow, or to bring forward any investments planned for the future. This will also fuel the production of these items and give a boost to that area of the economy. Historically, investment by UK businesses has been quite low, and these low levels have dropped even further throughout the Covid pandemic.
There was a drop of 11.6% between investment levels in quarter 3 of 2019 and quarter 3 of 2020. There is a gap in productivity between UK businesses and their worldwide counterparts and low investment is thought to be a driver behind this. Therefore, encouraging investment should go towards bridging the productivity gap for UK businesses and put them in a stronger post-Brexit position.
‘Plant and Machinery’ covers most tangible assets used in the course of business. Examples include computer equipment, lorries, vans and tractors, office desks and chairs and refrigeration units. Only plant and equipment bought new is eligible for the 130% first year allowance super deduction or the 50% special rate first year allowance.
This is the first time that HMRC has brought in a capital allowances relief rate in excess of 100%. There is also no upper monetary limit and very few exclusions as to the types of plant and machinery it can be used for, therefore making it very attractive to businesses.
Who is eligible for the 'super deduction' scheme?
However, the super deduction only applies to companies, and it is estimated that only 10-15% of farms involve a company of any sort. However, the 100% annual investment allowance is still available for partnerships and sole traders, as well as the new three-year loss carry back, so sole traders and partnerships may not wish to rush into decisions to incorporate, simply to benefit from the super deduction.
There is a joint lobbying initiative from a group of farming institutions including the Tenant Farmers Association (TFA) and the National Farmers Union which calls for the allowance to be extended to sole traders and partnerships. Lobbyists argue that extending the allowance eligibility criteria would ensure that the levels of investment which the economy has such a need for, would take place. This would be less likely with such a large proportion of businesses excluded from the allowance.
It is thought that the super deduction has been applied only to companies to make up for the rise in corporation tax from 19% to 25% with effect from April 2023. However, the groups lobbying for change have said that excluding the majority of rural and farming businesses shows a misunderstanding of the way in which the rural economy operates and places a limit on their contribution to growth in the wider economy.
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