AI Capital Allowance

The March 2021 Budget included two new tax reliefs in the shape of a ‘super-deduction’ to be given as a capital allowance for purchases of new equipment and the Special Rate (SR) Allowance. 

Promoted by the Chancellor to encourage businesses to purchase new equipment and grow profits, there are conditions you should be aware of before you decide to claim this allowance.

The super-deduction gives businesses investing in qualifying equipment a much higher tax deduction in the tax year of purchase than would otherwise normally occur – a ‘first year allowance’ (FYA). The allowances apply for purchases of new, unused plant or machinery (P&M) made between 1 April 2021 and 31 March 2023.

These new FYAs are only available to companies subject to corporation tax (not individuals, partnerships or LLPs) and only where the contract for the new, unused plant and machinery was entered into after 3 March 2021 and expenditure is incurred after 1 April 2021.

Qualifying purchases

The amount of capital allowance reduction varies depending on the type of asset purchased:

  • the ‘super-deduction’ will apply to P&M that ordinarily qualifies for the 18% main rate allowance, the deduction is equal to 130% of the expenditure
  • the SR Allowance covers new P&M that ordinarily qualifies for the 6% special rate allowance including integral features, the deduction for the year of purchase is equal to 50% of the expenditure. For subsequent years the normal 6% writing down allowance applies to the remaining expense
  • a special rate applies for expenditure incurred in an accounting period that straddles 1 April 2023 and if the equipment is sold or transferred
  • Unlike Annual Investment Allowance, there is no cap on the amount of capital investment that can qualify for these two reliefs.

Exclusions

The super-deduction doesn’t apply to spending:

  • in the final period of trading
  • on a car
  • on most types of long-life asset
  • on plant or machinery for leasing
  • where the plant or machinery is provided for purposes other that that for qualifying trade, for long-funding leasing or where the asset was received as a gift.

Disposal of the assets

If the assets on which super-deduction or SR Allowance have been claimed are disposed of after 1 April 2023, the sale proceeds will be subject to corporation tax at 25%.

If they are disposed of pre 1 April 2023, a special balancing charge calculation will be applied so that 130% of the disposal proceeds will become taxable.

An important note on planning your spending

You’ll want to plan your spending to generate the greatest tax saving and making use of the super-deduction can appear attractive. However, before you seek to take advantage of the super-deduction, make sure you run your numbers to check whether it will be the most tax efficient solution for you. In some instances, with the introduction of the higher rate of corporation tax from April 2023, it does not prove the most tax efficient route.