Capital Allowances – what’s changed in the Spring Budget?
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
16 March 2023
Chris Campbell reviews the Capital Allowances changes announced in the Spring Budget.
What has changed in the Spring Budget?
As previously announced, the 130% capital allowances super-deduction will come to an end on 31 March 2023 ahead of the planned increase in the main rate of Corporation Tax to 25%.
From April, companies had expected to only be able to rely upon the £1 million Annual Investment Allowance (AIA) to secure tax relief on their qualifying plant and machinery expenditure. For many companies, this would have covered their entire capital expenditure, but it would have left larger companies only receiving Writing Down Allowance on expenditure in excess of the AIA limit.
Chancellor Jeremy Hunt has now announced that limited companies will be able to benefit from Full Expensing, a new 100% First Year Allowance for assets in the Capital Allowances main pool and a 50% First Year Allowances for assets in the Capital Allowances special rate pool (including long life assets).
This change will mean that those companies which invest in plant and machinery will receive Corporation Tax relief, but those which do not could see their profits taxed at the new Corporation Tax rates as previously announced.
Like the super-deduction, Full Expensing cannot be claimed by unincorporated businesses, although they remain able to claim AIA on qualifying expenditure up to the £1 million annual limit. In the case of partnerships, AIA can of course only be claimed where all members of the partnership are individuals.
AIA can still be claimed by limited companies, which may be helpful in the case of special rate pool expenditure, as AIA will be preferable to the 50% First Year Allowance. But in the case of main pool additions, Full Expensing will achieve a better tax treatment.
Are there any additions on which Full Expensing is not available?
The normal Capital Allowances exclusions in Section 46 CAA 2001 will apply in the case of Full Expensing, as they did for the super-deduction. As well as leased assets, Full Expensing will not be available in the case of expenditure on cars and expenditure in the period when a business permanently ceases.
There will be similar anti-avoidance measures to the super-deduction rules to stop allowances under Full Expensing where arrangements are “contrived, abnormal or lacking a genuine commercial purpose”. When the Finance Bill is released, it is expected that the anti-avoidance provisions of Chapter 17 CAA 2001 will still apply to this expenditure.
Using the example of cars, the Capital Allowances available will be based on whether the car is new and unused and the car’s C02 emissions. Where a car is new and unused, a car with emissions pf 0 g/km (or fully electric) would receive 100% First Year Allowances under existing legislation. Second hand electric cars and non-electric cars with emissions of 50 g/km or less will receive Writing Down Allowances in the main pool at 18% per annum, whereas a car with emissions above 50 g/km would only receive Writing Down Allowances at 6% per annum.
So unless a car qualifies for 100% First Year Allowance based on its emissions, Full Expensing will not improve the tax relief available.
How does Full Expensing work when an asset is disposed?
Full Expensing has followed a similar departure from the normal Capital Allowances position, as was the case for the super-deduction. When a main pool asset subject to Full Expensing is disposed, the full proceeds of the sale of an asset will give rise to a balancing charge. When an asset subject to the 50% First Year Allowance is disposed, the balancing charge will be 50% of the disposal value.
Where an allowance has only being claimed in relation to part of the expenditure, the balancing charge will reduced accordingly.
What other Capital Allowance changes were in the Spring Budget?
The 100% First Year Allowance for electric vehicle charge-points will continue for a further two years. This means that the allowance will be available until 31 March 2025 for companies and 5 April 2025 for unincorporated businesses.
The government also announced 12 Investment Zones, which will benefit from targeted tax breaks, including Stamp Duty Land Tax relief (where applicable and the position may differ for devolved nations), enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and secondary Class 1 National Insurance relief. Further details are still to be announced in due course, but at least one zone is expected to be in each part of the UK.
What’s the ICAS reaction to the Capital Allowances changes?
ICAS welcomes confirmation that the new Corporation Tax rates announced in the 2021 Budget (but briefly reversed in the September 2022 Mini Budget) will still apply, meaning that the main rate of Corporation Tax will still increase to 25% from April 2023 for companies with taxable profits above £250,000.
However, whilst only 10% of companies are expected to pay the new 25% rate, the new concept in the Spring Budget of Full Expensing will enable companies to claim 100% Corporation Tax relief on qualifying expenditure on plant and machinery from 1 April 2023 to 31 March 2026, with the possibility of this treatment being extended beyond 2026.
As noted above, the new Full Expensing regime will provide 100% up front allowances on qualifying expenditure in the Capital Allowances main pool and 50% First Year Allowances in the Capital Allowances special rate pool. It's a significant investment, equivalent to an effective Corporation Tax cut of £9 billion per year and is a move that ICAS supports.
We believe the government needs to make sure that the UK is a competitive and attractive place to do business, particularly post-Brexit. A key part of this is a stable and consistent tax system, which allows both corporates and individuals to plan for the long term with certainty. Given the instability that arose in the aftermath of Kwasi Kwarteng’s Mini Budget in September, honouring these announcements will help reassure the markets that the UK is fiscally reliable and can fulfil its financial obligations. Tax should certainly not be a disincentive, indeed tax systems must work and HMRC needs to provide an effective service to all businesses, large and small. The Spring Budget, with some degree of clarity on the tax position over the next three years, is a welcome step in the right direction in terms of the UK achieving this goal.
Companies seek certainty and stability in Corporation Tax rates and take these into account when making investment decisions. This has an impact on the overall UK economy. Business will welcome clarification that there are no further planned changes to the 25% main rate of Corporation Tax, but given that the change is now being implemented alongside the new Full Expensing scheme for three years, this should help them to plan cash flows at a time of economic uncertainty.
For those businesses who are not able to invest in plant and machinery, the new Corporation Tax regime taking effect in April will still be fairly complex, with the Corporation Tax rate for companies with taxable profits below £50,000 remaining at 19% (an effective marginal rate of 26.5% applying for taxable profits between £50,000 and £250,000). These limits are of course affected by the reintroduction of the associated companies rules from April 2023, so the £50,000 and £250,000 thresholds will be shared between companies under common control as opposed to only between companies in a 51% group.
The way the Corporation Tax increase to 25% is now being applied is interesting, as the way it’s being structured means that those companies who can afford to invest millions in new plant and equipment will get full tax relief in year one. Before this Budget announcement, they would have only received £1 million Annual Investment Allowance, but this new First Year Allowance pretty much does away with that for the largest of companies. So the big guys who can afford it, don’t pay the new rate. However, it is important to remember there is clawback when the asset is then sold and this could increase the tax that companies pay in future if they sell but do not replace assets used in their business.
The Spring Budget did not change the previously announced position that the £1 million AIA limit will continue to be available to unincorporated businesses, a move that is strongly welcomed by ICAS. Chancellor Jeremy Hunt stated that this will mean that 99% of unincorporated businesses will still receive full upfront relief for expenditure on qualifying plant and machinery in the year of purchase. Where the expenditure is covered by AIA, the treatment is largely the same as the new Full Expensing regime for companies.
Since its introduction in 2008, AIA has provided businesses with an upfront incentive to invest in qualifying plant and machinery, the most notable exception being expenditure on cars. AIA is particularly useful for smaller businesses – SMEs will really benefit from the AIA limit at £1 million where all capital expenditure in a year on eligible plant and machinery may be covered. When the Chancellor previously put an end to changes to the level of AIA (which have been relatively frequent in the past) this also removed the need for businesses whose accounting periods straddle the date of any change to pay careful attention to the timing of expenditure to avoid losing out on relief.
Given that AIA will provide full relief for the vast majority of qualifying expenditure by unincorporated businesses, this will enable them to plan their future investment to expand and grow their businesses. It is worth bearing in mind that, as with the new Full Expensing regime for companies, businesses should plan for the clawback of capital allowances when the asset is eventually sold in future.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
