Recent capital allowances changes

October 2023

Depreciation of fixed assets charged in the accounts is not allowable in computing taxable profits. Instead, the UK government introduced capital allowances which is a form of tax relief that allows businesses which pay tax in the UK to deduct from their taxable profit (before calculating their tax liability), the value of their qualifying capital expenditure on assets such as equipment or buildings.

Back in March 2022, The Prime Minister, The RT Hon Rishi Sunak MP, back in March 222 when he was The Chancellor of the Exchequer hinted on a number of reforms to better support business investment in the UK. This is against the backdrop of the fact that when compared with other countries, the tax treatment allowable in the UK for capital assets such as those qualifying as plant and machinery, is much less generous that the OECD average.

Capital allowances is a financial benefit designed to incentivise businesses to invest in capital expenditure. Below are some key capital allowances changes in recent times which is meant to make the scheme even more lucrative for businesses.

Full expensing and 50% first-year allowances since 1st April 2023 until 31 March 2026

Full expensing is a 100% first-year allowance which allows companies to claim a deduction from taxable profits that is equal to 100% of their qualifying main pool plant and machinery expenditure in the year that expenditure is incurred.

For instance, this means that when a company spends £10m in acquiring any piece of plant or apparatus for carrying on their business activity for example, they will be entitled to deduct the £10m immediately in full from their taxable profit in that year. Assuming a 25% Corporation Tax rate, the immediate tax cash saving benefit would equate to £2.5m. This is far more generous than the immediate tax benefit expected in the default tax relief schemes (excluding the temporary 130% super-deduction which ended April 2023).

One of the criticisms from businesses about the UK capital allowances system is the complexity of it. Full expensing is therefore very popular amongst taxpayers due to how simplified and generous it has been designed to be.

Alongside the 100% full expensing on main pool items, the government additionally allows 50% first-year deduction in respect of special rate pool items. This 50% deduction is therefore known as special rate (SR) allowances.

Annual investment allowances (AIA) at £1m permanently since 1st April 2023

AIA allows a full deduction up to a certain annual limit in respect of the costs incurred on certain qualifying capital assets in the form of plant and machinery, during the year the spend was incurred. On the 1 January 2019, the annual limit was temporarily increased to £1m for two years. Prior to the expiry of the two years on 31 December 2021, the Chancellor of the Exchequer, The RT Hon Rishi Sunak MP during the 2021 autumn budget extended the £1m to 31 March 2023. Furthermore, during the Autumn budget 2022, the limit was set permanently at £1m.

The £1m permanent limit is a welcomed change that will make investment in qualifying capital assets even more rewarding. It is therefore important that businesses are maximising the benefit along with the other lucrative schemes such as the full expensing.

The AIA annual limit has changed a number of times over the years as shown in the table below.

AIA limit	Sole traders and partnerships	Limited companies
£1 million	1 April 2023 till date	1 April 2023 till date
£1 million	1 January 2022 – 31 March 2023	1 January 2022 – 31 March 2023
£1 million	1 January 2019 – 31 December 2021	1 January 2019 – 31 December 2021
£200,000	1 January 2016 – 31 December 2018	1 January 2016 – 31 December 2018
£500,000	6 April 2014 – 31 December 2015	1 April 2014 – 31 December 2015
£250,000	1 January 2013 – 5 April 2014	1 January 2013 – 31 March 2014
£25,000	6 April 2012 – 31 December 2012	1 April 2012 – 31 December 2012
£100,000	6 April 2010 – 5 April 2012	1 April 2010 – 31 March 2012
£50,000	6 April 2008 – 5 April 2010	1 April 2008 – 31 March 2010

Super-deduction and 50% first-year allowances between 1 April 2021 and 31 March 2023

The super-deduction scheme introduced in Finance Bill 2021 to amend Part 2 Capital Allowances Act 2001, is a two-year temporary first year allowances (FYA)[1] for certain qualifying capital assets in the form of plant and machinery. The scheme was announced on 03 March 2021 by the Chancellor of the Exchequer during the 2021 spring statement and is only available to businesses within the charge to corporation tax. The scheme took effect from 1 April 2021 and has ceased to be available for expenditure incurred after 31 March 2023. It however excludes contracts/agreement for specific cost items entered into prior to the announcement on 03 March 2021.

The super-deduction provides 130% first year deduction in respect of qualifying main pool items. Without any upper limit on the level of spend. Certain expenditures such as second-hand assets are excluded. Also, assets used within a ring-fence trade in the oil and gas sector are excluded.

Alongside the 130% super-deduction on main pool items, the government additionally allows 50% first-year deduction in respect of special rate pool items. This 50% deduction is therefore known as special rate (SR) allowances. The SR allowances is however, no longer available for expenditure incurred after the end of March 2023.

Structures and buildings allowances (SBA) rate increased to 3% straight-line deduction

SBA was introduced on 29th October 2018 (operative date). It is available on structural and similar building related works like walls, floors and roofs, in respect of a non-residential business activity. It is similar to the industrial building allowances and hotel building allowances that have now being phased out.

SBA is only claimable at 3% straight-line deduction annually which will take about 33 years. The tax relief rate was 2% over 50 years until 31 March 2020 in respect of Corporation Tax and 5 April 2020 in respect of Income Tax. SBA is available where the construction work commenced (and its agreement entered into) on or after the operative date. Generally, except for land, the part of the asset or property that do not qualify for PMA may potentially qualify for SBA, assuming the operative date requirement above is met.

To be able to claim SBA on a qualifying second -hand building, the claimant would need to be in a possession of a compliant “Allowances Statement” obtained from the vendor of the building to confirm certain legislative basis of claim.

Freeports (100% first year allowances + 10% SBAs)

Enhanced Capital Allowances (ECA)

To incentive global trade with local economic prospects, ECA relief was introduced in Finance Act 2021 to provide 100% first-year allowances (FYA) to businesses investing in qualifying plant and machinery for use in freeport tax sites.

A freeport tax site is a designated area of land relating to a port within which certain tax reliefs are available for investment in that area.

This ECA is not available to businesses which are not within the charge to Corporation Tax. This ECA relief is not to be confused with another now repealed similar allowances with the same name. The old ECA was in respect of energy and water efficient assets. It was repealed with effect from 1 April 2020 in respect of Corporation Tax and 6 April 2020 in respect of Income Tax.

Some conditions for the qualifying plant and machinery expenditure to be eligible for the new ECA relief are as follows:

it is incurred on or before 30 September 2026;
it is for use primarily in a freeport tax site at the time the expenditure is incurred;
it is unused and not second-hand;
it is incurred for the purpose of a qualifying activity within a trade, a mine, quarry or canal or other concern giving rise to profits from land charged to tax as a trade.

Enhanced SBA

Enhanced SBA provide a tax relief of 10% deduction annually over 10 years for qualifying assets in designated Freeport sites in the UK:

Teesside Freeport: Teesworks East, Teesworks West, Wilton International
Humber Freeport: Hull East, AMEP
Thames Freeport: Dagenham, Tilbury, London Gateway

The 10% relief is generous compared to the standard SBA rate of 3% annually. The conditions for qualifying enhanced SBA expenditure are as follows:

The works contract agreement date and the actual construction of the building / structure must begin when the area in which the building is situated is designated as a freeport tax site.
The building must be first brought into qualifying use at a time when the area in which the building is situated is designated as a freeport tax site and on or before 30 September 2026.
The qualifying expenditure must be incurred at a time when the area in which the building is situated is designated as a freeport tax site and on or before 30 September 2026.
The person who incurs the qualifying expenditure must be within the charge to income tax or corporation tax when it is incurred.
The relevant allowance statement must state that the qualifying expenditure is freeport qualifying expenditure.

Ring-fence trade assets (100% first year allowances if partly for other qualifying use)

Ring fence trades include the business activities relating to the exploration and production of oil and gas in the UK and the UK Continental Shelf UKCS. The new measure introduced in Finance Act 2021 is a temporary change to allow 100% first-year allowances (FYA) to be claimed on expenditure qualifying for plant and machinery used partly in a ring fence trade in the oil and gas sector. Previously, full 100% FYA relief is available if the asset is used wholly for a ring-fence trade.

As the expenditure is for use partly for the purposes of a ring fence trade and partly for the purposes of another qualifying activity, a claim for FYA should be allocated between the ring-fence trade and the other qualifying activity on a just and reasonable basis.

The conditions for qualifying plant and machinery expenditure to be eligible for the new measure are as follows:

it is incurred on or after 1 April 2021 but before 1 April 2023;
it is incurred by a company within the charge to corporation tax;
it is not within any of the general exclusions for FYA;
it is not special rate pool expenditure such as, electrical, air conditioning, and water systems.

Next Steps

Capital allowances is a vast topic and there are various forms, types and categories. Capital allowances can be claimed not only by companies, but also partnerships, individuals and overseas investors which carry out qualifying business activities such as a trade, property business, furnished holiday let, etc.

Are you planning to, or have you already incurred any commercial building or large-scale industrial and engineering plant related capital expenditure which may fall under any of the following categories?

New construction
Refurbishment works
Fit out works
Buying buildings

Please let us know as we can help you maximise your capital allowances tax cash savings and Boost Your Impact.

[1] First-year allowances (FYA) allow a full deduction of the costs incurred on certain qualifying capital assets in the form of plant and machinery, during the (first) year the spend was incurred. Hence it is called “first year” allowances.