How Companies Can Be Smart about New UK Capital Allowances
Ian Mackie
With four new major capital allowances in effect, UK companies have a lot to be happy about—if they can prepare.
When the UK government enacted four major capital allowances measures earlier this year—to much fanfare and as an ostensible economic panacea for a post-Brexit, pandemic-stricken economy—it effectively brought us back to the mix of high corporate taxes and generous allowances of the 1990s.
Still, companies looking to take advantage shouldn’t default to a been-there-done-that mentality.
There’s an obvious catch this time around, which might be why corporate decision making hasn’t changed much in the past several months: these measures are temporary, with the two most consequential policy amendments—the super-deduction and first-year allowance (FYA)—slated to sunset by 2023. At that point, corporate tax rates will rise to 25 percent, and it’s debatable whether the government will feel enough pressure to extend the allowances, let alone make them permanent. With politics being what it is, we might even see a revised and reduced replacement.
Companies still might see an opportunity to strike while they can. If they do, here’s what they need to know—and how they can prepare.
Know the details—and the dates
For those who aren’t well versed in UK tax law, capital allowances are tax relief that a UK business may claim against its taxable profit. Capital allowances may be claimed on many assets purchased for use in the business, but primarily fall under two categories—structures, and plant and machinery.
While there’s a short window to take advantage of the latest allowances, the new benefits for businesses are consequential. For starters, the super-deduction offers 130 percent first-year relief on qualifying main rate plant and machinery investments. Companies also can claim first-year relief of 50 percent on new (not secondhand) plant and machinery fixed assets, which have qualified for only 6 percent writing-down allowances in past years. Another “sweetener” is the extension of the Annual Investment Allowance (AIA), providing 100 percent relief for plant and machinery investments up to a £1 million threshold, as well as an enhanced Structures & Buildings Allowance (SBA+) for investments within eight so-called “Freeports”—a map of which you can find here.
Understanding the dates is equally crucial; expenditures have to be incurred between April 1, 2021, and March 31, 2023, to be eligible for the FYA and super-deduction. In contrast, SBA+ can be claimed until September 30, 2026. The AIA can be claimed only until December 31, 2021. Keeping track of dates can be time consuming, but businesses need to make sure expenditures fall within their accounting period. If adequate record keeping is not maintained, the computation of expenditures in a chargeable period may not be accurate, resulting in an incorrect tax return.
Make allowances work for current expenditures and future projects
Before planning future investments, businesses should focus on fixed-asset investments they are making now and ensure they’re taking advantage of expenditures that fall under the new capital allowance measures. Manufacturers and property investment groups, which already are making fixed-asset investments on a regular basis, stand to gain the most from an internal review—but any company reliant on physical assets such as vehicles can benefit from this approach.
Once companies have maximized their current claims, they can begin to look ahead toward upcoming expenditures, particularly regarding expansion and renovation. They need to make tactical decisions regarding contract development, examining how their approach might affect possible expenditures. For example, a construction company might want to consider whether it wants to place all expenditures for a single project on one contract or split that contract into different, smaller contracts—one focused on demolition, another focused on construction—if the plan includes demolishing an old factory.
Take special note if you’re an inbound investor
If your international business already was intent on establishing a new office, retail site, or manufacturing plant in the UK, now is the time to expand, ideally at a Freeport site. The SBA+ not only covers building new structures, but also allows companies to claim expenditures on purchased and leased structures, including repairs, renovations, and conversions. In addition, the super-deduction means that the UK government effectively is subsidizing a portion of corporate investment, a move which it is able to make now that it is no longer subject to EU State Aid restrictions.
Organize lobbying efforts, even with competitors
Extending or making permanent the new capital allowances measures—even in a slimmed-down form—would be a huge incentive for companies to expand their facilities and fixed assets in the UK. And companies should be prepared to lobby politicians amenable to their agenda.
One way to do this is by reaching out to potential allies who share aligned goals, even if they are competitors in the same industry, to coordinate funding efforts. Businesses could identify politicians who already have expressed support for the new capital allowances and schedule conversations with them. Even a short extension could help companies concerned about narrowly missing the eligibility window.
2023 is just around the corner
Anyone engaged in that kind of lobbying should take heart in the fact that the UK government has jumped on its own bandwagon of transforming the national economy to a high-skill workforce. That bodes well for the continuation of these new capital allowances, which are designed to encourage corporate investment amid economic uncertainty.
Simultaneously, some politicians might feel pressure to extend popular tax policies in the runup to the May 2024 general election.
But, at least for the moment, businesses shouldn’t bank on that happening. If they want to take advantage, they should act now—and prepare for the spigot to turn off in 2023.