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Capital Allowances – How to qualify for the new tax reliefs, and how to avoid the potential pitfalls?

Date: May 6, 2021

This month we will be focusing on the Capital Allowances specific detail within the 2021 Budget.

130% Super-Deduction

The Super-Deduction offers a significant tax incentive to invest in new plant and machinery over the next two years. This relief allows an additional 30% boost on top of existing capital allowances! It is uncapped, meaning there is no limit on the amount of qualifying expenditure that can be claimed in the relevant tax year, unlike the long-standing Annual Investment Allowance.

In order to claim, the following conditions must be met:

The Super-Deduction can only be claimed by companies. It is not available for individuals or partnerships.
The plant or machinery must be new and unused (not second hand). In terms of Catax clients, this means that only claims for commercial new builds, extensions or refurbishments will qualify. Claims on purchases of existing properties will not qualify unless acquired as new from a developer.
The expenditure must be incurred between 1^st April 2021 & 31^st March 2023. However, the contracts for this expenditure/work must not have been entered into before 3^rd March 2021 to qualify.
A claim for the Super-Deduction can only be made against General Pool (18%) expenditure. In terms of the claims that Catax generates, the type of installations that would qualify include carpets, fitted kitchenettes/cabinetry, signage, sanitaryware, and fire/security installations. Broadly speaking, the General Pool element makes up 35% of a standard Catax capital allowances claim.

130% Super-Deduction – The Balancing Charge Pitfall

Included within the new Super-Deduction conditions is the stipulation that when an asset that has been claimed using Super-Deduction is disposed of, i.e. sold, a balancing charge will be due on the disposal proceeds. This is effectively a repayment or claw back of at least a portion of the tax relief claimed when the asset is sold.

However, Catax has sought extra clarification from HMRC on this section of the legislation. We have clarified that a £2 s198 election can be utilised to restrict the disposal proceeds of the qualifying plant and machinery when calculating the balancing charge. This restricts any balancing charge to £2, allowing the company to retain the benefit of the Super-Deduction, creating a permanent benefit.

Please note that this permanent benefit is only possible for Super-Deduction claims on fixed/embedded fixtures where the company owns the property. If the company only tenants / leases the property and does not own the building, then there will be some level of repayment when they dispose of the asset through the balancing charge.

130% Super-Deduction – an example

Looking at this in an example Catax claim:

A Catax client spends £250,000 refurbishing an office block which they own and rent out for a commercial rate. We generate a claim of £145,000.

The £145,000 is broken down into the following pool values:

£50,000 – General Pool 18% expenditure
£95,000 – Integral Features Pool 6% expenditure

Under old rules, the £50,000 of General Pool would be included in the Annual Investment Allowance (AIA) claim as below:

AIA – Y/E 31.12.2022: 50,000 X 100% WDA = 50,000 X 19.00% = £9,500

Under Super-Deduction, the claim will look like the following instead:

AIA – Y/E 31.12.2022: 50,000 X 130% WDA = 65,000 X 19.00% = £12,350

This allows for an additional £15,000 of capital allowances, which translates as an additional £2,850 tax saving! A fantastic boost to claims which qualify!

50% First Year Allowances (FYA) for Special Rate Expenditure

Also introduced is a new First Year Allowance (FYA), which offers an uncapped additional 100% FYA on 50% of Special Rate Pool expenditure value.

This will mainly come into action when the AIA limit has been exhausted for the tax year, as currently, you can claim all of the Integral Feature value at 100% using AIA up to the £1,000,000 limit.

However, if the AIA limit is exhausted in full, then a claim on the £95,000 Integral Features in the example claim above will look like the following:

£47,500 – 50% of the £95,000 will be claimed under the new FYA
£47,500 – the other 50% of the £95,000 will be added to the Writing Down Allowance (WDA) pool as AIA has been exhausted.

50% FYA – Y/E 31.12.2022: 47,500 X 100% WDA = 47,500 X 19.00% = £9,025

Year by Year Benefit – Special Rate Pool

Y/E 31.12.2022: 47,500 X 6% WDA = 2,850 X 19.00% = £542

Y/E 31.12.2023: 44,650 X 6% WDA = 2,679 X 19.00% = £509

Y/E 31.12.2024: 41,971 X 6% WDA = 2,518 X 19.00% = £478

Y/E 31.12.2025: 39,453 X 6% WDA = 2,367 X 19.00% = £450

Y/E 31.12.2026: 37,086 X 6% WDA = 2,225 X 19.00% = £423

Poll continued to be written down until exhausted

There are similar conditions that must be met to claim this new FYA;

The 50% FYA of Special Rate expenditure can only be claimed by companies. It is not available for individuals or partnerships.
The plant or machinery must be new and unused (not second hand). In terms of Catax clients, this means that only claims for commercial new builds, extensions or refurbishments will qualify. Claims on purchases of existing properties will not qualify.
The expenditure must be incurred between 1^st April 2021 & 31^st March 2023. However, the contracts for this expenditure/work must not have been entered into before 3^rd March 2021 to qualify.
A claim for 50% FYA can only be made against Special Rate Pool (6%) expenditure. In terms of the claims that Catax generates, the type of installations that would qualify include plumbing/water installations, heating installations, lift installations and electrical installations.
The same disposal rules apply here; therefore, a £2 s198 election is needed to avoid any repayment of the benefit when the asset is sold. If the claim does not relate to fixtures within an owned building, i.e. the claim is made by a tenant / short-lease company, then there may be some repayment of the benefit.

Freeports

Finally introduced are Enhanced Capital Allowances (ECAs) and Enhanced Structural Building Allowances (SBAs) at Freeports. These allow for additional tax relief in very specific tax sites in areas of the country called Freeports; there are currently 8 Freeports. This topic will be covered in more detail in a future Tax Talk.

Summary

In the 2021 Budget, HMRC have offered some brilliant incentives to boost investment and help businesses recover from a challenging year. However, as with all new incentives, the right level of expertise is required to ensure the appropriate tax relief is claimed and that the right actions are taken to secure a permanent benefit.

As shown by Catax’s scrutiny of the new legislation, we have all the expertise to navigate our clients through HMRC waters to maximise their tax relief whilst also protecting them against any future clawback.

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