The 130% super deduction was introduced in April 2021 to boost capital investment. Without it, the UK is set to lag behind the Organisation for Economic Co-operation and Development (OECD) average for net present value for capital allowances for machinery. According to the 2022 Spring Statement, we will drop from first to 30th on its list of 38 countries.
HM Revenue & Customs and HM Treasury are considering seven potential changes (tabled below) with a view to plugging the hole that super deductions will leave. In recent conversation with HMRC, we discussed the respective pros and cons of each – and how capital allowances generally could be improved to help businesses.
The need for certainty was a key aspect of our feedback to HMRC. Whatever the new forms of incentives, they need to be simple to implement, clear on timescales and with enough lead time to enable all businesses (not just companies) to make buying decisions and to implement them.
A two-year window isn't long enough for a construction project that can easily take much longer from concept through to eventual delivery – for those projects, the super deduction only truly benefited companies that signed a contract after 3 March 2021 for a building due to complete before 31 March 2023.
| Possible changes being considered | Potential cost at peak in a single year (according to 2022 Spring Statement) |
| Increase permanent level of annual investment allowance to £1 million | £1 billion |
| Increase writing down allowances for pools from 18% and 6% to 20% and 8% (for general plant and machinery and special rate pools respectively) | £2 billion |
| First year allowance for plant and machinery pools of say 40% and 13% (for general plant and machinery and special rate pools respectively) | £3 billion |
| An additional first year allowance of say 20% to increase overall claim to 120% of original cost – 20% first year relief plus usual writing down allowances given for 100% of the expenditure | £4 billion |
| Introduce full expensing in the year of expenditure – no other G7 country has implemented this on a permanent basis | £11 billion |
| Possible changes to structures and buildings allowances | Not specified |
| New reliefs targeted for specific investments (such as enhanced capital allowances in freeport areas) | Not specified |
It seems that for capital allowances, a new relief first year allowance or a change in interpretation occasionally happen. Keeping abreast of the changes and how to achieve the best outcome may be difficult. One way to keep track is through the use of bespoke capital allowances software that can identify the capital allowances available and adapt to the changing landscape.
Our bespoke capital allowances tool, for example, is already enabling clients to uplift historic claims, delivering significant additional tax savings and repayments. A review of five years of expenditure increased one client’s claim by 72%, delivering more than £14 million of additional tax relief.
The Spring Statement indicated that the Autumn Budget will deliver one or more changes to enhance the initial capital allowances benefit after the end of the 130% super deduction on 31 March 2023. That relief is unlikely to be as generous as the super deduction for expenditure on plant and machinery, so it may be worthwhile acting ahead of this change in certain circumstances.
A loss-making company may be able to get an effective 32.5% relief against tax in the subsequent periods for purchases in an accounting period ending on or before 31 March 2023.
Companies that are likely to remain subject to UK corporation tax at 19% after 31 March 2023, due to annual profits chargeable to corporation tax of less than £50,000, should consider ensuring that purchases are in an accounting period that ends on or before 31 March 2023. This will prevent the super deduction phasing out rules from reducing the effective tax saving rate from 24.7% to 19%.
The end of 130% super deduction is only half of the story. It may be that the potential replacement incentives give a better overall outcome for companies. Timing will be critical to improve the benefit available. Companies will need to be ready to complete orders and take delivery in the short window between the 2022 Autumn Budget and their subsequent year end – assuming it is before 31 March 2023 – to be able to assess and take advantage of the favourable outcome. This, however, is likely to be far easier said than done.
To discuss this topic further or understand how our bespoke capital allowances tool can help you improve your capital allowances claims, contact Jeremy Chapman.
Our bespoke capital allowance tool identifies the opportunity to uplift historic claims to deliver additional tax savings often overlooked by others.
