Upcoming changes to capital allowances - do you need to act now?

There have been several changes announced over the past few months with regards to the Capital Allowance regime.

As we approach 1 April 2023, many of these changes take effect. 

Therefore, the coming weeks are a crucial time for businesses to consider their capital investment.  

Below is a summary of some of the key relevant points with regards to the upcoming changes.

Super-Deduction

Since 1 April 2021, the super-deduction has been a welcome addition to the Capital Allowance regime for many businesses. However, the super-deduction will be ending on 31 March 2023. 

It is therefore important that businesses consider whether they may wish to bring forward any planned investments, to make use of the extra allowances before it ends. 

How the Super-deduction Works

To recap, the super deduction is a first-year capital allowance applicable to any expenditure incurred on new plant and machinery. 

Previously, this expenditure would receive a Capital Allowance of 100% of the cost via the Annual Investment Allowance (AIA), or if the AIA had already been used, there would be written down allowances at a rate of 18%. 

However, the super-deduction is more beneficial, resulting in Enhanced Capital Allowances of 130% of the cost. This means that where a company invests £50,000 in new plant and machinery, it will receive a deduction of £65,000 from its taxable profits instead of £50,000, providing greater tax savings. 

Another key factor of the super deduction is that there is no upper limit spend – if the expenditure qualifies it will all receive the 130% allowance, making it extremely valuable. 

In comparison, the AIA is capped at £1m per year, and once this is used, the allowance drops to 18%. 

Impact of Corporation Tax Increase

Bringing forward any capital investments may be beneficial, especially to businesses who could fall within the marginal tax band of 26.5% from 1 April 2023. 

As mentioned in my colleague Andrew Macleod's article regarding the Corporation Tax Rate change, businesses that have taxable profits of between £50,000 and £250,000 for periods from 1 April 2023 onwards will not have a Corporation Tax rate of 25% (higher limit) or 19% (lower limit). Instead, the effective tax rate for profits within this range will be 26.5%. 

It may therefore be beneficial for companies in this position to bring forward any investments to the pre-1 April period, so that not only do you receive the extra 30% of Capital Allowances via the super deduction before it disappears, but also so that your taxable profits from 1 April 2023 are potentially not reduced to below £250,000 by those delayed investments and thus fall within the marginal tax rate. 

Additionally, the super deduction is beneficial to businesses whose profits are expected to remain within the lower limit (i.e., profits of up to £50,000) and continue paying Corporation Tax at 19%. 

Therefore, the super deduction represents a real tax saving of which to take advantage before it ends. 

Beware of the Super Deduction Taper

A caveat to the above. The super deduction relief is tapered away as its end nears.

For example, a smaller company with a February year end might rush to buy something before 1 April 2023, thinking it will achieve 130%, but in reality it will only get 102.55%. Assuming its profits are below £50,000, it will only get relief at 19%, so if it would cause them cash flow issues to buy it early it’s not a huge benefit if AIA is otherwise available, especially with the cost of borrowing increasing. 

It would be prudent to discuss this with us before taking any action.

Annual Investment Allowance (AIA)

The long-anticipated fall in the AIA from £1,000,000 to £200,000 from 1 April 2023 is also no longer taking place, as the AIA limit is remaining at the full £1,000,000 on a permanent basis. 

This will be extremely beneficial to larger businesses making investments, as it means that they will not have to wait for relief via writing down allowances where the expenditure exceeds the originally planned £200,000 limit. 

Further information

To summarise, businesses should review their future investment plans to determine if making use of the super deduction would be beneficial to them before it ends.

If you would like to discuss this further, please feel free to contact me or another member of our Business Tax team 

[Ashleigh Ingram, Tax Executive, Bishop Fleming]