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March 31, 2023
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Spring 2023 Budget – Capital Allowances - Full Expensing Introduction

What are Capital Allowances?

When businesses/companies employ capital assets (e.g. plant and machinery) for use in their business, such costs are not deductible from trading profits because the expenditure will have an enduring benefit for the trade. Instead, relief is available through Capital Allowances which essentially allows relief for the fall in value of capital assets, providing a deduction when arriving at the taxable profits of the business. It is the equivalent for tax purposes to the depreciation charge that is often shown in business accounts.

Capital Allowances are a form of tax relief that can be claimed by traders when they incur expenditure on 'plant and machinery'. The case law, along with the Capital Allowances Act 2001 and HMRC practice, suggests that an asset qualifies as 'plant' if it has an expected life of two years or more and has a clear function in enabling the activities of the business to take place.

Capital Allowances up to 31 March 2023

In the Spring Budget 2021, a new ‘Super Deduction’ Capital Allowances relief was introduced, meaning that companies could deduct 130% of the qualifying expenditure incurred on plant and machinery that would fall within the 'main pool' and investing companies could also benefit from a 50% first-year allowance (FYA) for 'qualifying special rate assets' up until 31 March 2023.

In addition to the above, 100% of 'qualifying costs' are deductible for plant and machinery up to £1 million under the annual investment allowance (AIA), with a writing down allowance (WDA) of 18% on any excess main rate pool costs and 6% for special rate pool assets.

Capital Allowances from 1 April 2023

The standard Corporation Tax rate will rise from 19% to 25% from 1 April 2023 onward for companies with taxable profits exceeding £250,000. In addition to this, the current 130% super-deduction for capital allowances detailed above is due to come to an end on 31 March 2023.

To encourage investment from 1 April 2023 to 31 March 2026, the government have introduced full expensing for capital allowances in the Spring Budget 2023. Therefore, companies can claim 100% capital allowances on qualifying expenditure incurred on new main rate plant and machinery on or after 01 April 2023 but before 01 April 2026.

This allows full expensing of qualifying expenditure in the year it is incurred - there is a requirement that the plant and machinery must be new and unused. For example, £100,000 spent on qualifying items would give £25,000 off a corporation tax bill for a company with profits over £250,000 from 1 April 2023.

Currently, only companies are eligible to benefit from the full expensing and unincorporated businesses (such as sole traders and partnerships), will not be able to claim this. As with the super-deduction, there is no limit on the amount of expenditure that can qualify for the full expensing Capital Allowances.

Where the business has 'special rate' expenditure that does not qualify for full expensing, the 50% FYA discussed above can be claimed by the business instead - this will have similar conditions as full expensing. This will be in place until 31 March 2026.

Furthermore, the AIA providing 100% tax relief on £1,000,000 of expenditure has become permanent from April 2023. The AIA is available to all businesses, including unincorporated businesses and most partnerships, which provides similar benefits to the full expensing.

If you require any advice/assistance with capital allowances, please contact us.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice to determine which capital allowances you can claim.

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Structures and Buildings Allowance – Capital Allowances

£1m Annual Investment Allowance Extension: The Immediate Practical Effect for Businesses

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