Capital allowances are a valuable form of tax relief provided by governments to incentivise businesses and individuals to invest in capital assets. These allowances allow taxpayers to deduct a portion of the cost of acquiring or improving qualifying assets from their taxable profits, thereby reducing their overall tax liability.
Understanding the different types of capital allowances available for plant and machinery is essential for maximising tax benefits and making informed investment decisions. In this article, we will explore the various types of capital allowances available for plants and machinery.
Annual Investment Allowance (AIA)
Annual Investment Allowance (AIA) provides a 100% allowance for investment in plant and machinery (excluding cars) up to £200,000. From 1 January 2019 until 31 March 2023, businesses were able to benefit from an Annual Investment Allowance (AIA) limit of £1 million. However, the government has recently announced its intentions to establish this £1 million limit permanently through new legislation outlined in the Spring Finance Bill 2023.
If the accounting period of the business is less than 12 months long, the AIA is proportionately reduced. Expenditure more than the available AIA will be dealt with under the standard rules for capital allowances, qualifying for writing-down allowances in the general pool or special rate pool. Any unused AIA will be lost i.e., the unutilised portion cannot be carried forward.
General Exclusions for Annual Investment Allowance
The AIA is granted exclusively for “AIA Qualifying Expenditure,” although there are some general exclusions that apply. A wide range of expenditures is eligible for the AIA, but “General Exclusions” for AIA are:
- Expenditure incurred in the chargeable period when the qualifying activity is permanently discontinued
- Car
- Certain expenses incurred for ring-fenced trades
- Expenditure incurred in connection with a change in the nature or conduct of another person’s trade or business, where obtaining an AIA is the primary benefit
- Cases where an asset has been received as a gift
- Situations where an asset initially provided for other purposes starts being used for a qualifying activity
- Expenditure used for other purposes of plant and machinery provided for long-funding leasing.
First-Year Allowances (FYAs)
First-Year Allowances (FYAs) give businesses an enhanced rate of capital allowances on plant and machinery in the accounting period in which the expense is incurred. Unlike writing-down allowances, FYAs are not time-apportioned in short accounting periods.
Special types of qualifying expenditure attract FYAs at 100% – this means that the whole of the expenditure is deducted from trading profits in the period. The 100% FYA is only available if these assets are acquired new.
Expenditure attracting First-Year Allowances
The following types of expenditure attract FYAs at 100%:
- Cars with zero CO2 emissions
- Plant or machinery for a gas refuelling station
- New zero-emission goods vehicles (until April 2025)
- Electric vehicle charging points
- Plant or machinery for use wholly in ring-fence trade
- Plant or machinery for use in designated assisted areas
50% First-Year Allowances (50% FYA)
50% First-year allowances (FYAs), also known as Special Rate (SR) allowances have been introduced when a company incurs special rate capital expenditure on qualifying plant and machinery. To claim the 50% FYAs the expenditure must:
- be incurred by a company between 1 April 2021 and 31 March 2023
- be on new unused plant and machinery
- not be excluded expenditure (e.g., expenditure on cars)
The 2023 Spring Budget delivered positive developments for businesses by extending the Special Rate (SR) allowance for an additional three years, now valid until 31st March 2026. This extension enables them to deduct 50% of the cost of qualifying assets from their profits before tax.
Writing Down Allowances (WDA)
Writing Down Allowances (WDA) operates on the fundamental principle of providing tax relief for capital expenditure over a span of several years, similar to the accounting concept of depreciation. Unlike being based on the original cost of the asset, WDAs for plant and machinery are calculated annually based on the reducing value.
To be eligible for WDAs, the expenditure must be included in a designated pool. Generally, qualifying expenditure on plant or machinery is allocated to the main pool, unless specific circumstances require it to be assigned to a class pool or a single-asset pool.
Main Pool
Writing Down Allowances (WDA) for the Main Pool allows businesses to deduct a fixed percentage, currently set at 18%, of the tax written-down value of these assets from their taxable profits each year. The Main Pool includes most plant and machinery assets, excluding certain special rate assets.
Special Rate Pool
Writing Down Allowances (WDA) for the Special Rate Pool is a method of claiming tax relief on specific qualifying assets used in business operations. The WDA rate for the Special Rate Pool is currently set at 6%. Expenditure to be allocated to the ‘special rate pool’ consists of expenditure incurred on the following:
- Integral features
- Long-life assets
- Thermal insulation of buildings used in a business
- Cars with CO2 emissions of more than 50g/km (110g/km for expenditure incurred before 1 April 2021)
- Solar panels
Small Pool
The small pool rules come into effect when the value of a pool does not surpass £1,000 during the year. This value is determined by subtracting the total disposal receipts that must be considered from the available qualifying expenditure. If the pool’s value remains below £1,000, the entire amount can be written off in a single instance. It’s important to note that the £1,000 limit is proportionately adjusted for short accounting periods and does not apply to pools consisting of a single asset.
Single–Asset Pools
A single-asset pool refers to a specific category within capital allowances where a particular asset is treated separately from other assets. This means that instead of being grouped together in a general pool or class pool, the single asset has its own designated pool. Such pools are generally required for short-life assets. Assets such as cars, ships, long-life assets, and assets with partial non-business use and expenditure within the ‘special rate pool’ (integral features etc) are excluded.
Question
Are assets that fall into the Special Rate Pool eligible for Annual Investment Allowance (AIA)?
Yes, such assets apart from cars are eligible for AIA. Any excess expenditure will be placed in a separate special rate pool where it will be eligible for a 6% writing-down allowance (WDA), rather than the 18% allowance that is available to assets going into the general pool.
If there is both main pool and special rate pool expenditure in an accounting period, the 100% AIA is allocated as follows:
- First, allocate the AIA to assets in the ‘special rate’ pool.
- Allocate any remaining AIA to the ‘main’ plant and machinery.
Super-deduction
The concept of the super-deduction was introduced during the 2021 Spring Budget specifically for companies that incurred capital expenditure on plant and machinery between 1st April 2021 and 31st March 2023. This special first-year allowance allowed for a 130% tax deduction, representing a 30% increase from the actual expenditure incurred. For instance, if a company had costs of £10,000, they could claim capital allowances of £13,000 under the super-deduction scheme.
It is important to note that the super-deduction came to an end on 31st March 2023. However, businesses can still claim the allowance for the qualifying expenditure incurred between 1st April 2021 and 31st March 2023.
Full Expensing
In the Spring Budget of 2023, Full Expensing was introduced for companies that invest in plant and machinery. This allows companies to deduct 100% of the qualifying capital expenditure from their taxable income in the year it is incurred. The full expensing applies to capital expenditure made between 1 April 2023 and 31 March 2026. This initiative replaced the previous super-deduction scheme, which allowed for a 130% deduction.
Excluded Expenditures for Full Expensing
Generally, most of the assets used for the business qualify. But below are not eligible:
- Cars, ships, railway assets
- Used and second-hand assets, gifted assets, assets leased to someone
- Assets transferred from a connected person
- Land and buildings (structural and building allowances apply instead)
- Assets under special rate pool
- Assets acquired as part of arrangements which are not normal
- Assets not used or business
- Assets purchased during the accounting period when the qualifying activity ceases
Balancing Allowances and Balancing Charges
Balancing allowances and charges are important concept for capital allowances. They come into play when there is a significant change in the ownership or use of an asset, or when an asset is disposed of.
A balancing allowance arises when the proceeds from the disposal of an asset are less than the tax written-down value (WDV) of the asset. In such cases, the balancing allowance increases the total capital allowances claim for the year, resulting in a reduction of taxable profits.
On the other hand, a balancing charge occurs when the proceeds from the disposal of an asset exceed the tax written-down value. This results in an additional taxable profit, reducing the overall capital allowances claim for the year.
Example
Suppose ABC Ltd started a business on 1 May 2022 and the first set of accounts were drawn by the company to 31 December 2022. The company incurred the following capital expenditures during the accounting period:
1 May 2022 – Car (CO2 of 139g/km) £20,000
1 May 2022 – Car (CO2 of 49g/km) £12,000
1 May 2022 – Computers £2,000
The accounting period of the company is eight months, so the writing-down allowance will be restricted to eight months.
For31 December 2022,
| AIA@100% | General Pool | Special Rate Pool | Total CAs | |
| Additions | ||||
| Car (CO2 of 139g/km) | £20,000 | |||
| Car (CO2 of 49g/km) | £12,000 | |||
| Computers | £2,000 | |||
| AIA@100% (W) | (£2,000) | £2,000 | ||
| WDA @ 18% * 8/12 | (£1,440) | £1,440 | ||
| WDA @ 6% * 8/12 | (£800) | £800 | ||
| Tax written down value c/f | £10,560 | £19,200 | ||
| CA Claim | £4,240 |
Conclusion
While the Writing Down Allowance (WDA) is commonly considered the default allowance for plant and machinery, it’s important to note that there are other options available that can potentially accelerate tax relief. Depending on specific circumstances, businesses may benefit from claiming First-Year Allowances (FYAs), Full Expensing, or Annual Investment Allowance (AIA).
Overall, understanding and utilising capital allowances can result in significant tax savings and should be an integral part of tax planning for businesses and individuals investing in capital assets. Consult with us today to ensure compliance with the latest regulations and to optimise tax benefits.
