Issue 10 – Capital Allowances - introducing a new super-deduction ?
What are they?
When companies spend money on capital expenditure, these are not deductible revenue expenses, and accounting depreciation is not a deductible expense for corporation tax purposes.
Up steps capital allowances (which many refer to as tax depreciation) which allows companies to take a specific fixed percentage deduction each year as tax relief.
What is eligible?
Only qualifying expenditure is eligible for capital allowances.
As a general rule, it is capital expenditure with which the trade is carried on, rather than in which the trade is carried on, which is considered eligible.
To explain this further, business vehicles, fixtures and fittings, machinery and equipment are generally eligible and are included in what is known as the main or general pool.
Walls, doors, windows, structures etc are generally not eligible.
Certain items such as air conditioning, lighting and heating systems known as integral features are eligible for capital allowances, but they are included in what is known as the special rate pool, which attracts tax relief at a reduced rate (albeit over their lifetime all eligible assets will get 100% tax relief).
Rates of relief
The main pool attracts relief at 18% per annum on a reducing balance basis.
The special rate pool attracts tax relief at 6% per annum on a reducing balance basis.
The annual investment allowance gives 100% tax relief on the first ￡1m of eligible capital spend, excluding cars (this ￡1m limit is in place until 31 December 2021 but is subject to change).
So, if for example Company A spends ￡1.25m on special rate pool assets and ￡1.25m on main pool assets in a given year, the tax deduction it will be able to claim is as follows:
￡1m special rate pool x 100% (Annual Investment Allowance) = ￡1m
￡250k special rate pool x 6% = ￡15k
￡1.25m main pool x 18% = ￡225k
Total tax deduction = ￡1.24m
We could have claimed the annual investment allowance against the main pool assets first, but this would have given us a lower deduction given the special rate pool attracts tax relief at a lower rate.
The budget – what has changed?
It was announced in the Budget earlier this month that a super deduction is to be introduced for eligible spend on main pool assets between April 2021 to April 2023.
Not only does this give a 130% first year deduction (rather than 100%) which gives 30% of additional tax relief, but there is no limit such that the full spend is eligible for this super deduction.
The new rules also give special rate pool assets a 50% first year allowance (rather than 6% as above).
So looking at the above example with the new super deductions:
￡1m special rate pool x 100% (Annual Investment Allowance) = ￡1m
￡250k special rate pool x 50% = ￡125k
￡1.25m main pool x 130% = ￡1.625m
Total tax deduction = ￡2.75m
You will also note that without the super deduction, the total lifetime tax relief in connection with the assets in the first example would have been ￡2.5m, but with the super deduction this increases to ￡2.875m.
This shows how valuable this new super-deduction can be.
It can help to reduce a company’s tax bill by 19%, or if the company is loss making it can increase the losses either to be carried forward against future profits or to shelter profits in other group companies by way of group relief or as an increased surrenderable loss for R&D purposes.
----
?? A huge thank you to Shimon Vogel, our Associate Director in Tax, who has put together this content for us. If you had any questions or wanted to discuss this in more detail, reach out to us and let us know.
We hope you have enjoyed this article and have picked up a few takeaways that will help you if you invest into capital expenditure and want to know how the new relief will benefit you.
Remember - if you want to collaborate on an article or would like to hear more about specific topics, please do not hesitate to get in touch and we will get it on our roadmap.
We're looking forward to sharing the next issue with you in 2 weeks.
Team ihorizon
??
Articles to date:
- Issue 10 - Capital Allowances - The new super-deduction
- Issue 9 - Pitch Deck Refresher - What should you be thinking of including in your deck
- Issue 8 - EMI Options - Engaging your team through EMI options
- Issue 7 – Growth Shares – How they could work for you as an incentivisation strategy
- Issue 6 – Brexit – Post transition period updates to impact on VAT & Tax for our clients
- Issue 5 – Client Spotlight, our friends at DataForm on their sale to Google
- Issue 4 – Navigating the new SME R&D Tax Credit Cap as a Startup
- Issue 3 – Brexit – Impact on VAT & Tax for our client base
- Issue 2 – Focus on Financial Management Information - How to read your reports
- Issue 1 – Launching ihorizon Sigma, our R&D product
- The Launch
Strength in Numbers is curated by the team at ihorizon, a firm that supports startups with accounting, tax and commercial advice and services. The team who contribute cover disciplines such as R&D, Financial Management & Control, Financial Modelling, Fundraising, Tax Advice, Structuring, VAT, Personal Tax Issues, Grant Funding and Corporate Compliance.
For more information about ihorizon and how we work with our clients across all service areas, take a look here and get in touch.