In an effort to help the economy and support businesses through the coming months, Chancellor Rishi Sunak announced new temporary tax reliefs on plant and machinery in his March 2021 budget. This was introduced to entice businesses to invest in plant and machinery by offering a higher level of relief than previously available.
When is this applicable?
This temporary tax relief will allow businesses within the charge to Corporation Tax to invest in plant and machinery for qualifying expenditure from 1 April 2021 until 31 March 2023. This will include a super-deduction on most new plant and machinery investments, the allowance will be 130% for investments that usually qualify for 18% main rate writing down allowances. There will also be a first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for a 6% special rate writing down allowances.
Businesses can use capital allowances to write off the costs of substantial capital assets. This includes plant and machinery which could offset against a business' taxable income. They take the place of commercial depreciation, which is not a tax-deductible expense.
Enhanced rates of relief are provided by first-year allowances for some investments in plant and machinery if the claims are made in the period the expenditure is incurred. The introduction of the super-deduction enhances this first-year allowance to exceed the cost of the asset, giving tax relief at an effective rate of 24.7%.
When tax rates go up, income is taxed at a higher rate but costs also reduce tax at a higher rate, so without this super-deduction there may be an incentive for businesses to delay purchasing new plant & machinery until 2023, when the headline rate of corporation tax increases from 19% to 25%. It is likely therefore that this measure was aimed at the large organisations with substantial capital expenditure, because accelerating this spend will aid the recovery of the economy. However, the increased tax rate only applies to companies with profits exceeding £50,000, so there is a real opportunity for smaller businesses to take advantage of additional tax savings.
Key exceptions to be aware of are cars and second-hand equipment, which will not qualify for the super deduction.
There are also claw back provisions in the event that eligible equipment is sold prior to 1 April 2023.
Other changes from 1 April 2023
With the introduction of the 25% main rate from April 2023, we will see a tiered corporation tax system for the first time since 2015. Whilst this brings complexity, it also brings opportunity. It will be possible to plan the timing of expenditure in order to ensure it attracts the highest rate of relief available. Working with a proactive accountant that fully understands and considers such matters is therefore more important than ever as the tax landscape evolves.
If you want to speak to one of our partners to find out more, please get in touch with your local branch.