As you can see from our guide to tax relief for capital expenditure there are currently two generous tax breaks available for expenditure on qualifying plant & machinery – the well-known Annual Investment Allowance (AIA) and the shiny new super-deduction which was launched with great fanfare in the 2021 budget. But what do these deductions cover and which might apply to your company?
When the super-deduction was announced we were a little confused as to why the government had also extended the AIA limit to £1m – if businesses could claim 130% tax relief under the super-deduction, why would anyone still be claiming the AIA which only gives 100%?
However, as is so often the case, once you dig into the details of the new relief it is clear there will be some expenditure which qualifies for the AIA but not the super-deduction, and some expenditure for which the AIA actually gives a better result.
The differences between the two, together with the different time periods involved, mean that working out the most beneficial relief is going to be complex for the next couple of years, and means that the timing of capital expenditure could have a significant impact on the tax relief available.
The Super-Deduction vs the AIA:
The super-deduction is available on expenditure incurred between 1 April 2021 and 31 March 2023.
It is only available on expenditure on new assets, second hand assets don’t qualify unlike the AIA.
There is no cap, whereas the AIA is currently limited to £1m and is reducing to £200k from 1 January 2022.
The super-deduction is only available to companies
A reduced rate of deduction applies to assets which would into the special rate pool rather than the main pool such as electrical and plumbing works (known as integral features) – they only get 50% deduction. These qualify for AIA as normal and therefore could get 100% relief.
Therefore, if your company is spending money on second hand assets or integral features it is likely the AIA will still provide the most tax relief.
It should also be noted that the super-deduction ceases at the same time the corporation tax rate increases to 25%; we suspect this is not a coincidence as 130% relief at 19% CT equates to 24.7%… therefore, the availability of the super-deduction should not necessarily be used as justification for accelerating significant capital projects, although this will depend on the amounts involved and the AIA threshold at that time (which is currently proposed at £200k but this may be changed between now and then).
Whenever the AIA threshold changes there are prescriptive rules setting out how much is available to businesses whose year end crosses the date of change and they are usually particularly punitive when there is a decrease in the AIA limit. These rules mean that businesses making large capital purchases in December 2021 will have significantly more AIA available than those who delay the purchase until 2022. For example, a business with a March 2022 year end would be entitled to a total allowance of over £800k for the whole period but only £49k of this would be available for any expenditure incurred after 1 January 2022.
Ensuring your business is getting the maximum tax relief for its capital expenditure can have a significant impact on tax liabilities and therefore cashflows. This, together with the additional complexity introduced by the super-deduction, means that it is vital you seek advice in this area over the coming years. In particular, the timing of expenditure in the next 6 months will be particularly important so do get in touch if you would like to understand the relief available before committing to a purchase.