The Chancellor, Rishi Sunak’s budget announcement should help turbo-charge capital investments in the UK with new super capital allowances costed at £29bn over the next 4 years. The extension of loss relief carry-back to 3 years is also positive and makes claiming capital allowances a potent tool in reducing corporation tax and triggering repayments of tax. The 8 new Freeports is also positive. The sting though is property businesses are denied these super allowances as are individuals and LLP’s. Future planned increases to corporation tax of 25% will make capital allowances even more valuable.
The capital allowances changes are as below:
130% “Super-deduction” and 50% First Year Allowances
One critical point to flag is these super capital allowances are denied to property companies letting properties as they are regarded as a leasing business for tax purposes. They will also not apply to individuals or LLP’s.
They will apply to all trading businesses such as hotels, nursing homes and other operational businesses. Where a property business may benefit is if they operate serviced offices.
Companies (excluding unincorporated businesses and individuals) by way of a “Super-deduction” from 1 April 2021 for two years will be able to write-off 130% of their expenditure on new/unused Main Rate Pool (MRP) assets in the first year (without any expenditure limit), which would ordinarily qualify for an 18% write-down per annum. MRPs within a building context includes assets such as fire alarm systems, security systems and carpet flooring.
In addition, companies will be able to write-off 50% of their expenditure on new/unused Special Rate Pool (SRP) assets in the first year (without any expenditure limit), which ordinarily qualify for a 6% write-down per annum. SRPs within a building context includes assets such as lifts, heating and cooling systems and solar shading. The balance of the SRP expenditure will qualify for allowance on a 6% reducing balance basis.
It should be noted that the above will apply to construction expenditure where contracts entered into on or after 3 March 2021. These rates are applicable to expenditure incurred on new assets between 1 April 2021 and up to including 31 March 2023.
The above will not apply to second hand plant and machinery. It may apply where a trading company buys an unused property from a property developer. Such as a distribution company buying a building from a property developer. It would be excluded though if it bought the property in a separate property company and leased it to the trading business.
For both corporates and unincorporated businesses, the usual MRP at 18%, SRP at 6%, Land Remediation Relief (LRR) at 150%, Structures and Buildings Allowances (SBA) at 3% and Annual Investment Allowance (AIA) at 100% for expenditure up to £1m will be applicable.
Case Study 1
Company A a construction services company, refurbished their leasehold office property for circa £5m in year end 31 March 2022. The expenditure is incurred after 1 April 2021. A capital allowances specialist segregates the expenditure as follows; MRP of £2m (including assets such as demountable partitions, carpet and desks), SRP of £1m (including assets such air conditioning and lighting) as £1m and SBAs of £2m (includes the remaining construction expenditure).
The impact of the 130% super-deduction and the 50% first year allowance is compared below to pre-budget write-down rates.
Main Rate Pool (MRP) of £2m and Special Rate Pool (SRP) of £1m, provides a first year tax saving of £594k ((£2m x 130% x 19%) + (£1m x 50% x 19%) + (£1m x 50% x 6% x 19%)) with a future tax saving of £89k.
Main Rate Pool (MRP) of £2m and Special Rate Pool (SRP) of £1m, provides a first year tax saving of £258k ((£2m x 18% x 19%) + (£1m x 100% x 19%)) with a future tax saving of £311k.
Please note for both the above calculations the impact of SBAs have been excluded. However for the pre-budget calculation the Annual Investment Allowance (AIA) of £1m has been utilised against the SRP.
You will note, the tax relief is slower based on the pre-budget calculation (£311k in the first year) compared to the post-budget calculation (£594k in the first year), which provides a much faster and greater amount of total tax relief.
Lovell Consulting Comment
The 130% super-deduction and 50% first year allowances provides a tax benefit which exceeds original cost and accelerates tax relief in the first year. Given this is a two year temporary measure, it is recommended that you instruct a capital allowances specialist to segregate your capital expenditure and utilise this favourable tax relief, especially with the cash-flow disruption caused over the last year.
Freeports Tax Sites
The Government announced the first Freeports in England and they will begin operations from late 2021. The eight locations designated are East Midlands airport, Liverpool, Felixstowe, Humber, Plymouth, Thames, Teeside and Solent.
Freeports tax sites are designated areas where the government encourages businesses to invest in to create trade and jobs and as a result benefit from generous tax reliefs. The tax benefits are as below:
- An Enhanced Capital Allowance of 100% for companies investing in plant and machinery (applying to both Main Rate Pool and Special Rate Pool assets) for use in designated Freeport tax sites. Companies will be able to write-off 100% of their expenditure in the first year. This will remain available until 30 September 2026. No detailed legislation has been issued, but it is likely to be targeted at trading businesses. Property companies will potentially be denied.
- An Enhanced Structures and Buildings Allowances (ESBA) at a 10% rate for constructing or renovating non-residential structures and buildings within Freeport tax sites in Great Britain. Once the location is designated a Freeport tax site, the tax relief is obtained at a 10% write-down per annum on a straight line basis. Ordinarily SBAs are relieved at a lower 3% write-down per annum on a straight line basis for non-freeport tax sites. This will be made available for corporation tax and income tax purposes. To qualify, the structure or building must be brought into use on or before 30 September 2026.
Lovell Consulting Comment
We welcome these measures as it will encourage investment in undeveloped sites and it is an attractive and timely opportunity to invest. Therefore we recommend you seek capital allowances specialist advice in order to obtain the maximum benefit from your capital investment.
Annual Investment Allowance
Initially announced in November 2020, the Chancellor has confirmed that the Annual Investment Allowance (AIA) of £1m has been temporarily extended for expenditure incurred on plant and machinery (includes both Main Rate Pool and Special Rate Pool assets) during the period 1 January 2021 to 31 December 2021.
Most corporate and unincorporated businesses and individuals regardless of their size are able to claim the AIA in respect of their expenditure on plant and machinery. It is not available to be used against expenditure qualifying for Repairs, Land Remediation Relief and Structures and Buildings Allowances.
Lovell Consulting Comment
The AIA provides an important stimulus in encouraging capital investments by taxpayers. It is still however important to segregate expenditure as the relief is only available to plant and machinery assets. A capital allowances specialist can help with segregating the expenditure and maximising the full potential of this relief.
LOSS RELIEF CARRY-BACK CHANGES
The loss relief carry-back changes are as below:
3 Years Loss Relief Carry-Back
The loss relief has been extended so that the period companies / unincorporated businesses can carry back tax losses increased from 1 year to 3 years. It will apply to accounting periods / tax periods ending on or after 1 April 2021 / 5 April 2021. The immediate preceding year tax losses carried back is unlimited. This extension means after the preceding year the total amount that can be carried back in each extra year is £2m. Consequently a company could effectively get a maximum corporation tax repayment back from HMRC of £760k (£4m x 19%) for the additional years carried back. This combined with the super first year capital allowances will help trigger substantial tax repayments and tax losses to carry forward.
This is further complemented by the opportunity to revisit historical expenditure and claim in a current tax return period in order to benefit from a repayment of tax. There are no time limits for revisiting old expenditure and making claims in current tax periods provided the assets are still in existence and used in the course of your business.
Lovell Consulting Comment
As businesses have suffered unprecedented disruptions to their cash flow over the last year, it is important to utilise these reliefs to obtain tax refunds from HMRC for tax previously paid. Also to carry-forward losses to shield against planned future corporation tax increase to 25% from April 2023. A capital allowances specialist will be able to segregate new expenditure and also unlock unclaimed historical expenditure. Therefore it is important to seek specialist capital allowances advice.
Please find below the link to the budget 2021 tax related documents:
Please note the changes are based on draft legislation and subject to further HMRC consultation.
If you have any queries, please do not hesitate to contact the team on 020 7329 1300. www.lovellconsulting.com