Is it a good time to start that project or buy equipment?

04 Apr 2022

By Dan Hayley, Associate Tax Consultant at WR Partners

“If your business needs investment and financially this is viable, there may never have been a better time, from a tax perspective, to undertake substantial projects and to purchase plant and machinery. From 1st April 2021 to 31st March 2023 a new capital allowance was introduced, called the Super Deduction. This will be more advantageous than the Annual Investment Allowance (“AIA”) in most circumstances, however only companies can claim the Super Deduction meaning that it is not available to unincorporated businesses such as sole traders and partnerships/ LLPs.

The Super Deduction gives relief at 130% of the qualifying cost compared to the usual 100% AIA or 18% writing down allowance for investment in main pool plant and machinery assets. There is no limit on the amount of expenditure which can qualify but there are various other exclusions from the Super Deduction. Most notably the machinery acquired has to be new, although second hand items could still qualify for AIA.  Most assets which are acquired for the purposes of leasing to other parties will also not qualify, nor will expenditure on cars.

There is also the SR Allowance, which gives a 50% deduction in the year of purchase for items in the special rate pool, such as an electrical system. As the 50% deduction is less than a 100% deduction through the AIA, it will usually be preferable to claim AIA instead of the SR Allowance.

For businesses which do not qualify for the Super Deduction, and for any business buying items which fall outside the new relief, the amount and timing of expenditure may be critical in determining whether tax relief is obtained for 100% of the cost in year one or potentially only at a rate of 18% (or 6%) per year over a number of years. 

The AIA has been maintained at its highest level since the allowance was introduced in April 2008. From the 1st January 2019 the AIA has stood at £1 million per year and will be maintained at that level until 31st March 2023, reducing back down to £200,000 on 1st April 2023. This means that you can spend up to £1 million on qualifying plant and machinery during that period and obtain 100% capital allowances in year one.

Qualifying assets for AIA need to be used by a business for the purpose of carrying out the qualifying business. This does not include stock or business premises. It does include plant and machinery such as tractors, machines, tools, vans, lorries, and diggers as well as computers, office furniture and fixed equipment. Integral features in a new building may also qualify for AIA but not for the Super Deduction. This is not a comprehensive list, so if you are unsure whether the asset you’re purchasing will qualify for either AIA or the Super Deduction, we would advise speaking to  us for confirmation.

Due to both the Super Deduction being set to be abolished and the AIA £1 million allowance set to decrease on the 1st April 2023, it would be advisable for businesses that have a year-end that straddles 1st April 2023 to seek advice to understand how to best make use of these generous allowances. It is important for businesses to understand when they should be spending to make the most of any allowance available.

Rules around the time at which capital expenditure is treated as incurred for tax purposes can also be complex so careful planning may make a material difference to a business’ overall tax position.”

If you would like to discuss the Super Deduction or AIA in more detail, please contact your WR Partners point of contact via email or call us on 01743 273273.

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