Capital Allowances

A “super-deduction” will be introduced from 1 April 2021 until 31 March 2023 allowing companies to benefit from a 130% first-year allowance for capital expenditure on qualifying new plant and machinery assets. This deduction will allow companies to potentially reduce tax payable by 25p for every £1 invested in eligible plant and machinery.

The super-deduction will apply to expenditure on new main pool plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances. A temporary first year allowances of 50% known as a “SR allowance” will also apply to companies investing in new plant and machinery qualifying for special rate pool plant and machinery. This will include qualifying expenditure on integral features in a building and long life assets that normally qualify for 6% writing down allowances.

The measures announced will not apply to qualifying expenditure on “second hand” or “used” plant and machinery and will not apply to expenditure incurred in respect of a contract entered into prior to 3 March 2021. Any companies that have already contracted for the provision of plant and machinery will only be able to claim capital allowances at the normal standard rates.

Certain general exclusions to first year allowances will also apply including, for example, expenditure on cars, plant or machinery for leasing etc. for which the super-deduction will not apply. Where an accounting period straddles 1 April 2023 the rate of the super-deduction will be apportioned accordingly.

A further consequence of the super-deduction is that there will be amendments to the disposal rules for plant and machinery that has qualified for the allowance. Disposal receipts will be treated as balancing charges rather than an adjustment to the plant and machinery pools. Adjustments will be required if only part of the expenditure has been claimed as part of the temporary allowance and to apply a factor to the disposal receipts depending on the chargeable period in which the disposal takes place. Similar provisions apply where an SR allowances has been claimed. As would be expected, anti-avoidance provisions apply.

The Finance Bill will also include provisions for the extension of the temporary increase in the rate of the Annual Investment Allowance (AIA) of £1 million for the period to 31 December 2021 that was announced on 12 November 2020. The AIA will still be available to all businesses and therefore companies will need to consider the allocation of AIA where any expenditure may not qualify for the super-deduction or SR allowance in its relevant chargeable period.

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