Capital allowances: maximising tax incentives ahead of impending changes

The generous 130% super-deduction capital allowance and 50% special rate first year (SR) allowance schemes are due to end on 31 March 2023.

Ahead of this date, it would be beneficial for companies to think about accelerating major property investment projects to take advantage of these capital allowances while they can.

Incentivising growth and investment with the super-deduction and SR capital allowances

The super-deduction and SR allowances were introduced in the spring budget 2021 to encourage more investment in plant and machinery assets. This included commonplace fixtures in buildings that are installed as part of new-build, extension or refurbishment projects. The super-deduction and SR allowances are for the expenditure on new and unused plant and machinery assets bought between 1 April 2021 and 31 March 2023, where the contract to buy the equipment was agreed on or after 3 March 2021. As they are only available to companies, sole traders, partnerships, and LLPs who use the 100% annual investment allowance (AIA) for spend up to a £1m cap each year alongside the usual tax relief rates of 18% for main pool items and 6% for special rate assets.

The 100% AIA is also available to companies, but the super-deduction has no expenditure ceiling and gives a greater tax deduction, which is 130% of the cost of main pool items. This uplifts the tax deduction to 30% more than the money spent. The SR allowance gives an immediate 50% tax write-off for new and unused qualifying ‘special rate’ plant and machinery (such as major mechanical and electrical services installations), with the balance of tax relief to follow later. So, if the total yearly spend on special rate items exceeds £1m and the AIA is exhausted, then the SR allowance boosts the rate of relief from 6% a year to 50%.

Preparing for April – speak to a tax specialist

The period where the super-deduction and SR allowance can be claimed is about to expire. While the tax position shouldn’t necessarily wag the investment dog, if there are plans for a major property investment project either as landlord or tenant, which is likely to exceed the £1m 100% AIA cap, then it could be beneficial to carry out those plans sooner rather than later.