New temporary capital allowances on the cost of new plant

COVID-19

Businesses claim tax relief for the purchase of capital assets by means of capital allowances. Currently the ‘annual investment allowance’ (AIA) gives tax relief of 100% of the cost of plant and machinery up to £1m. The AIA continues to be available.

However, for companies only, two new first year allowances can be claimed instead of the AIA for expenditure on new assets (not used or second hand) incurred between 01/04/21 and 31/03/23.

Super-deduction

The first one, referred to as a ‘super- deduction’ gives tax relief of 130% of the cost. This can be claimed only on plant which would normally qualify for the main rate of writing down allowance.
Where the accounting period straddles 1 April 2023, then the super deduction is reduced to 100% plus a proportion of 30% pro rata to the number of months in the accounting period ending before 1 April 2023.

When the plant is sold, a balancing charge equal to the sale proceeds will be taxed on the company, except that if it is sold in an accounting period ending before 1 April 2023 the balancing charge will be 130% of the sale proceeds, or a pro rata proportion of that if the accounting period straddles 1 April 2023.

Special-rate Allowance

The second new first year allowance of 50%, referred to as an ‘SR allowance’ can be claimed on plant which only qualifies for the special rate of writing down allowance, such as hot and cold water systems and other integral assets. In that situation therefore it may be better to claim the AIA of 100% instead.

Neither the super deduction nor the SR allowance can be claimed on expenditure which is generally excluded from first year allowances, such as cars and equipment for leasing. Also, relief cannot be claimed where the contract for purchase was entered into before 3 March 2021.

Unincorporated businesses are expected to continue to claim the AIA since they cannot claim the super- deduction or SR allowance.

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