Spring Budget: Changes to Capital Allowances
16th March 2023
Spring Budget: Changes to Capital Allowances
In the recent Spring Budget announcement by Chancellor Jeremy Hunt, we saw the introduction of two major capital allowances for qualifying UK businesses from 1st April 2023. This was alongside the announcement of changes to the Annual Investment Allowance and the rate of Corporation Tax.
Full Expensing (FE) Capital Allowance
Allowing those businesses paying Corporation Tax to deduct 100% of any qualifying plant & machinery expenditure, the Full Expensing (FE) capital allowance is applicable from 1st April 2023 until 31st March 2026.
Using FE, businesses will be able to deduct 100% of the cost of any qualifying expenditure from their profits straight away – rather than over the life of the asset – giving an effective tax saving of up to 25p for every £1 invested.
The FE capital allowance covers all new plant and machinery investment that would ordinarily qualify for the 18% main pool rate of writing down allowances. As a general rule of thumb, this includes investment in such items that would generally be required “to trade” rather than expenditure “within trade.” For example, investment in new factory conveyors would qualify, whereas the associated heating and hot water systems would not. Cars are also excluded from the FE allowance. Examples of qualifying expenditure include:
- Vehicles and construction equipment such as forklift trucks, tractors, lorries, bulldozers and vans
- Computer equipment such as servers and printers
- Office furniture such as chairs and desks
- Tools such as drills, ladders and cranes
The Chancellor also gave indication that he hoped the FE capital allowance would be a permanent addition to the range of capital allowances available.
The 50% first-year allowance (FYA)
This capital allowance permits eligible businesses to deduct 50% of the cost of any qualifying plant & machinery expenditure from their profits during the first year of purchase, with the remaining balance to be written down at the usual 6% rate in consequent years.
Originally introduced alongside the super-deduction capital allowance, the First-Year Allowance (FYA) applies to any expenditure that would usually qualify for the Special Rate pool of 6%.
Qualifying expenditure items include integral building features and those assets with a lifespan of over 25 years.
Examples of qualifying expenditure include:
- Pipework
- Solar panel systems
- Electrical systems
The 50% FYA was due to end on 31 March 2023 but it was announced in the budget that it has now been extended until 31st March 2026 – giving businesses an additional 3 years. Again, the government’s aim is to make the 50% FYA capital allowance permanent.
What should I do now and do these announcements impact my tax planning?
If you have a qualifying business paying Corporation Tax then you should consider the impact of the announcement of these capital allowances on your immediate tax planning for both the tax year 22/23 and also for any future tax years.
Key things to consider within any tax planning strategy now will include:
- If you plan to dispose of your assets, as balancing charges will apply and the new rate of Corporation Tax will impact what you owe
- The change to the Annual Investment Allowance (AIA). Both FE and 50% FYA capital allowances are in addition to the announced permanent £1 million threshold for the AIA, which amounts to full expensing for 99% of businesses by providing 100% first-year relief for plant and machinery investments up to £1 million. Importantly, the AIA carries no balancing charges on the disposal of assets.
- The forthcoming increase of Corporation Tax from 19% to 25%
- Whether you intend to carry on any losses into future tax years
With a number of changes to both Corporation Tax and capital allowances, the use of these tax reliefs will need careful consideration and their impact on the tax liabilities of any business. Individual circumstances will apply and you should consult your tax adviser and accountant now before the 31st March for the most tax-efficient approach for your business for the tax year ending 2023, as well as future tax years.
Our tax department can help consider your specific circumstances and advise on the best course of action for your business. Contact us now for further information.
