By Mark Anthistle, Senior Capital Allowances Analyst at Catax.
The Chancellor of the Exchequer, Philip Hammond, announced on 29th October that there are to be significant changes made to the way UK businesses can obtain tax relief via capital allowances going forward. They are namely an increase in the Annual Investment Allowance (AIA), a decrease in the rate of writing down of the Special Rate Pool, and the introduction of Structures & Building Allowances (SBAs).
AIA Increase (The Good)
The AIA has fluctuated many times since its introduction in 2008. Starting at £100,000, it dropped to £25,000, then increased to £250,000 & £500,000 before eventually settling at £200,000 in January 2016.
But from January 2019 the AIA is to rise to a whopping £1,000,000!
The dramatic increase in AIA will benefit all UK businesses making significant capital investments, including Catax. These businesses are now able to obtain tax relief on all qualifying plant & machinery expenditure up to the value of £1,000,000 all in one go, as opposed to writing down the capital allowances over many years on reducing balance rates of 8% and 18% per year.
The Special Rate Pool Rate Reduction (The Bad)
In 2008, the Special Rate Pool was introduced to sit alongside the existing Main Pool and was set up to house all qualifying plant & machinery that was deemed to be an integral feature (e.g. heating, electrics, water, ventilation, lifts). The rate of Writing Down Allowance (WDA) for this new pool was to be half that of the Main Pool at 10%, meaning that it takes significantly longer to claim the available capital allowances.
The Finance Act 2011 reduced the rates of WDA to 18% for the Main Pool and 8% for the Special Rate Pool from April 2012. Unfortunately, this rate is to be cut again for the Special Rate Pool to 6% WDA from April 2019.
As the majority of qualifying expenditure we identify for capital allowances purposes falls into the Special Rate Pool, this affects the rate of benefit and cash flow for our clients.
The Introduction of SBAs (The Ugly)
Historically, Industrial & Agricultural Building Allowances (IBAs) were available to UK businesses on expenditure incurred in construction works relating to commercial buildings of this nature. This allowance offered tax relief on the cost of the entire build project (aside from any land costs), not just the typically qualifying plant & machinery. The rate of relief was at 4% per year on a straight-line basis meaning that any qualifying building had a tax-life of 25 years. If a qualifying building was sold during this period, a clawback of the allowances claimed up to that point may have been imposed on the seller depending on the date of sale.
IBAs were phased out in 2008 and withdrawn entirely in 2011. This had a considerable impact on a number of businesses who had been claiming these allowances, as they were unable to then claim Plant & Machinery Allowances (PMAs) on any residual balance they may have had following the abolishment of IBAs, and, therefore, could have missed out on large sums of valuable tax relief.
However, the introduction of Structural & Building Allowances (SBAs) were announced in the Budget, which are to be available on any new commercial build where contracts have been entered on or after 29th October 2018. This relief mirrors that of IBAs in that it is available on all build costs and is relieved on a straight-line basis, although it is at a rate of 2% rather than 4%. Any building which qualifies for SBAs, therefore, has a tax-life of 50 years. Where SBAs also differ from IBAs is that there is no clawback of allowances if the building is then sold. The residual balance is simply passed on to the buyer who continues to write down the SBAs at the same rate.
It is still worthwhile for clients to come to us to identify the plant that qualifies for PMAs, as the rate of benefit is significantly quicker, coupled with the availability of £1,000,000 of AIA on PMAs. A client could still claim SBAs on the non-qualifying PMA expenditure (e.g. walls, windows, doors, roofs, etc.).
Other Areas of Interest
The Government has also announced the abolition of Enhanced Capital Allowances (ECAs), with effect from April 2020, for energy and water efficient assets, and there is to be clarification from HMRC on the meaning of the word ‘plant’ for capital allowances purposes, following the recent SSE Generation Ltd vs HMRC first-tier tribunal case.