The Super-deduction allowance came to an end on 31 March 2023. The Super-deduction gave companies a strong incentive to make additional investment in plant and machinery equipment, in order to lower their tax liabilities, enabling business growth.
Like many other plans that were revealed on 15 March 2023 during The Chancellor Jeremy Hunt’s Spring Budget, changes to capital allowances were announced.
But are the new changes to capital allowances superior to the Super-deduction policy?
Never fear, Chris Roberts, Capital Allowances Director, is here to explain the changes in more detail, and share his opinion on whether he thinks the changes implemented are positive or not.
Over to Chris…
As already stated, the Super-deduction policy came to an end on 31st March 2023. A new policy package has now been announced, which is actually quite similar in practice but does remove some of the benefits offered by Super Deduction. The recently revealed strategy ensures that the UK’s capital allowances regime will continue to be the joint most competitive in the G7 and OECD.
The budget also confirmed two major capital allowances, which combined are suggested to be worth £27 billion over the next three years. In addition to this, the UK will see an effective corporation tax cut of £9billion for businesses.
I’ve outlined below what these two key changes to capital allowances are:
Full Expensing (FE)
This policy will replace the super-deduction and has already come into effect (1 April 2023), and will be valid for three years. It’s only available to companies and allows them but allows tax payers to claim 100% of the cost of qualifying main/ general pool expenditure from their profits.
It’s a procedure similar to the Annual Investment Allowance, which is used to deduct the full value of an item that qualifies from your profits before tax, but there is no upper limit.
The FE is claimable in respect expenditure that qualifies as main or special rate pool only. Examples of this can include vans, lorries, laptops, technology equipment, sanitary ware and office furniture, like desks and chairs.
In addition to companies being able to claim 100% of the cost of qualifying expenditure from their profits, if a company is paying the new corporation tax rate of 25%, this will result in a saving of 25p for every £1 spent, or 19p for every £1 spent for companies who have profits under £50,000.
This scheme is planned to end in March 2026 with no current intention to make this a permanent allowance.
The 50% first-year allowance (FYA)
Like the above, this scheme is only available to companies. This allowance is in respect of qualifying expenditures that are classed as special rate assets, examples of these are
- Lighting
- Plumbing
- Heating
- Solar panels
Taxpayers are able to cut 50% of the cost from their profits before tax within the same year of the purchase. The remaining 50% is written down using the 6% special rate pool.
This allowance was originally introduced on 1 April 2021, and similar to the super-deduction was planned to end on 31 March 2023. The allowance has now been extended for another 3 years, and will end on 31 March 2026.
Just to highlight, the Annual Investment Allowance of £1 million still exists. For a lot of small businesses, this allowance will be enough to satisfy claiming 100% tax relief on any qualifying asset purchases.
My thoughts on the changes…
To be ever so slightly pessimistic, the changes aren’t exactly a game changer for the majority of SMEs, or for those who spend less than £1 million a year on qualifying fixed assets. Despite this, the introduction of the Full Expensing treatment of qualifying items does introduce a significantly accelerated tax benefit to those spending in excess of £1 million on new or general or main pool items.
Upholding the 50% First Year Allowance is definitely welcomed, it removes the dramatic decrease from 100% to 6% of writing down allowances where the £1 million Annual Investment Allowance is utilised in a given tax year against capital spend.
We can help
If the changes to capital allowances that were highlighted in the Spring Budget have you wondering if you are able to reduce your tax liabilities, we are here to help. To discuss and explore the possibility of capital allowance for your business, you can book in a 1-to-1 session with our specialist team by emailing info@djhmittenclarke.co.uk.
