UK companies still have plenty of time to take advantage of business investment initiatives rolled out by the Government last year.
During the Spring Budget in March 2021, Chancellor Rishi Sunak announced a new measure known as the ‘super-deduction’ to encourage directors to invest in plant and machinery assets with a 130% capital allowance.
Businesses can also look to benefit from the annual investment allowance (AIA), but can’t use both in tandem.
This blog will explain when you can make use of investment reliefs and how much can be claimed.
What is the super deduction?
The super deduction allows companies to invest in new plant and machinery assets before 31 March 2023 and receive 130% first-year capital allowance.
Usually, these would qualify for the main writing-down allowance of 18%.
If you were to invest £100,000 in qualifying assets, for example, you’d be able to deduct £130,000 when you calculated your taxable profit. This deduction would reflect a saving of up to 19% on your investment, or £24,700 in cash terms.
The deduction was introduced to help boost productivity and aid the UK’s recovery from the COVID-19 pandemic.
The Treasury said last year: “Making capital allowances more generous works to stimulate business investment. As a result, these measures can promote economic growth and counter business cycles.”
HMRC defines plant and machinery items as used in your business as:
- Items you use in your business, including vehicles
- Air conditioning and electrical systems
- Fixtures, such as fitted kitchens and bathrooms
You’ll also be able to claim for the costs of installing or demolishing existing plant and machinery.
Some assets don’t qualify, such as:
- Leased items
- Buildings, including gates, shutters, mains water and gas
- Land and structures, like bridges, roads and docks
- Items used for business entertainment
If you entered into an investment contract before April 2021, you won’t qualify for the super-deduction. Similarly, if you make an investment in 2023 and your end-of-year date is after 1 April, you won’t qualify for the full 130%, although you might be eligible for a portion.
AIA and the super deduction
The current level of the AIA has also been extended to 31 March 2023, which means investment by sole traders, partners and companies on plant and machinery up to £1 million can be eligible for a 100% deduction for tax purposes.
While the super deduction can be used for new and unused assets, the AIA can be applied to purchases of second-hand assets which will not qualify for the deduction.
AIA can also be applied to purchases of special-rate assets that attract relief at a lower rate of 50% under the super deduction.
Businesses can deduct the full value of the first £1m from their taxable profits in the year of expenditure.
While the AIA runs until 31 March next year, if the business’s accounting period straddles this date, the limit will be apportioned as it is for accounting periods which are not a year long.
If you are ever unsure about whether your company’s investments qualify for the super deduction or the AIA, the team at FMA is on hand to help you through the process.