New Corporation Tax Capital Allowances Regime

by | Sep 29, 2021

Companies and Capital Allowances

A new ‘super deduction’ first year allowance (SDFYA) of 130% will be given to companies (only companies) for expenditure on new and unused qualifying plant and machinery, acquired between 1 April 2021 and 31 March 2023.

Accordingly, capital allowances on eligible expenditure of £100,000 will be worth £130,000. The effective corporation tax saving will be £130,000 @ 19% = £24,700.

However, when this plant is sold, there will be, in most cases a claw back of all (or the majority) of the allowances previously given. The SDFYA gives relief at 130% of the new qualifying expenditure incurred. This would include new lorries and vans. It must be noted that only new and unused asset expenditure qualifies for this 130% SDFYA.

The following expenditure will not qualify:

  • Cars
  • Electric cars
  • Long life assets
  • Assets leased out in the course of a letting or leasing business
  • Integral features
  • Solar panels

The SDFYA is indeed only available to companies. Individuals i.e. sole traders and partnerships will not qualify for the SDFYA. They will have to continue to rely on the 100% Annual Investment Allowance (AIA).

Additionally, for companies, the 100% AIA remains in place as well and the AIA can be used to get tax relief for certain expenditure (e.g. second hand assets) that do not qualify for the 130% SDFYA.

Companies therefore get two things…

  • The 130% super deduction and
  • The 100% AIA

The AIA limit has been extended to £1million up to 31 December 2021.

The 30% uplift for capital allowances on qualifying plant expenditure compensates companies for ‘early’ capital expenditure, before the corporation tax rate goes up from 19% to 25% on 1 April 2023.

If a company buys qualifying new plant, they only get 19% corporation tax relief before 31/3/2023.  The SDFYA gives you effective relief of 130% x 19% = 24.7% i.e. practically equal to the 25% corporation tax relief after 31/3/2023.

Balancing Charges

The SDFYA items are kept separate and individually tracked – a bit like short life assets, which have their own separate pools. Details must be kept individually and recorded separately of these items. You must be able to separately identify them on disposal. Your tax software will do this for you.

When the SDFYA plant is then sold in an accounting period up to 31/3/2023, the disposal proceeds are increased, normally by a factor of 30%. There is going to be another factor for the period between 1/4/2023 and 31/3/2024.

If 130% of the disposal proceeds apply, a balancing charge will result of that amount.

The usual capital allowances rule, which results in the disposal proceeds being deducted from any available tax written down value of the main pool, will not apply here.

If the company sells the SDFYA item of plant after 31/3/2024, the balancing charge will be the normal sale proceeds. The corporation tax will then be charged (in most cases) at 25%.

When you look more closely at these SDFYA rules, the balancing charge claw backs will considerably reduce the effective value of the SDFYA, especially if the plant has a short economic life.

n some cases it might be more beneficial for the company to claim the 100% AIA, particularly for anticipated short economic life assets, if the company has a substantial tax written down value on its main pool. The balancing charge hit then will be much less, i.e. the actual sale proceeds could be wholly or mainly swallowed up by the TWDV brought forward.

Additionally, during the same period of between 1 April 2021 and 31 March 2023, a 50% first year allowance (FYA) will be given on purchases of new and unused special rate (SR) pool assets. This will be given on integral features i.e. air conditioning, lifts, heating, electrical systems and cold water systems. Solar panels will also be included in this category.

A similar balancing charge will crystalise in the disposal period relating to the assets that qualified for the 50% FYA. This will be charged at 50% of the asset’s disposal value.

If the company’s expenditure does not qualify for:

  1. the 130% SDFYA; nor
  2. the 100% AIA; nor
  3. the 50% FYA

it will be added to the main plant pool (at 18%) or the special rate pool of 6%, as appropriate.

Tim Palmer CTA ATT – Tax consultant


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