Business Services, Business Tax

How to navigate the new capital allowances rules

By RJP LLP

How to navigate the new capital allowances rules

Whilst most taxes are increasing, the Chancellor is keen to encourage business investment, and this is evident in the enhancements made to capital allowances. The previous super deduction policy is coming to an end but a replacement, for full expensing of plant and machinery investments over the next three years, is a new and very positive addition.

Full expensing means that the full cost of a qualifying investment can be offset against corporation tax in the first year. Currently offered for a three-year period, the Chancellor has indicated he intends to make full expensing a permanent policy. It will certainly be welcomed by the thousands of businesses due to pay higher levels of corporation tax from April 2023.

The way in which the new corporation tax rate is calculated will vary depending on profit levels. According to the Chancellor, only around 10% of companies will pay the full 25% rate but a large number will pay an increased rate, somewhere between 19% and 25%, on profits between £50,000 and £250,000. If these companies make investments in qualifying plant and machinery, the level of taxable profits will reduce, meaning they could potentially remain within the 19% tax threshold. Bear in mind this only applies to limited companies; unincorporated businesses do not pay corporation tax.

The full expensing rules are much more straightforward in terms of implementation than those for the super deduction, and if companies were considering making capital investments anyway, post April 2023 will be a good time to make the move.

How to use the new full expensing allowances

Here’s how full expensing will work in practice:

Available for companies only and not unincorporated businesses;
Companies can offset the full cost of new ‘main pool’ plant and machinery against taxable profits in the year of expenditure;
Expenditure must be incurred between 1 April 2023 and 31 March 2026 (although this may be extended);
Existing 50% first-year allowances for expenditure by companies on new special rate (including long life) assets will remain in place until 31 March 2026;
Full expensing is for companies only as mentioned already. The AIA (annual investment allowance), which allows for £1m to be claimed on plant and machinery in a single accounting period remains available to unincorporated businesses;
Qualifying plant and machinery must be new and unused. It excludes cars but it does include the purchase of software;
Second hand assets, leased equipment and subscription-based payments for plant and machinery can be accounted for using the AIA alongside full expensing.

One further condition exists for “special rate” expenditure that doesn’t qualify for full expensing. In these instances, a 50% first-year allowance can be claimed using the same broad conditions that apply for full expensing. In practice this means that a deduction from taxable profits that is equal to 50% of the qualifying expenditure can be claimed in the same year that the expenditure is incurred. Capital allowances can be claimed on the balance of expenditure in subsequent accounting periods at the 6% rate of writing down allowances for special rate expenditure.

The whole area of capital allowances is complex for both companies and unincorporated businesses. If you are considering making an investment in plant and machinery, please get in touch so we can support you, by emailing partners@rjp.co.uk.

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