The Chancellor, Rishi Sunak’s Budget 2021 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. Super capital allowances only apply to companies and they are denied to individuals and LLP’s. Future planned increases to corporation tax of 25% will make capital allowances even more valuable.

When the legislation was first issued, property companies were denied these super allowances. However, a late amendment to the Finance Bill on 18 May has extended super capital allowances to property companies.

The capital allowances changes are as below:

130% “Super-deduction” and 50% First Year Allowances

Companies (excluding unincorporated businesses and individuals) will benefit 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.

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.

Post-budget Calculation

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.

Pre-budget Calculation

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.