Last week the Chancellor of the Exchequer released his Spring Budget.
With the UK now predicted to narrowly avoid a recession in 2023, the Chancellor focused on delivering the government’s growth plans.
A raft of measures were announced to spur growth and keep the recession at bay, including the extension of some business tax reliefs, ongoing funding for the levelling up agenda and targeted measures to encourage more people back into work.
The Spring Budget has initiative that is particular interest to the print, display, packaging, corrugated and carton industries.
The Capital Allowances Offer
As a result of the measures announced in this Budget, businesses will be able to take advantage of the following benefits:
- Full expensing, which provides 100% relief in the first year to companies for eligible investments made in main rate plant and machinery from April 1, 2023 to March 31, 2026.
- The 50% first-year allowance (FYA), which allows companies to claim a deduction of 50% for eligible investments made in new special rate assets, including long-life assets, until March 31, 2026.
- The Annual Investment Allowance (AIA), which provides 100% first-year relief for eligible investments made in plant and machinery up to £1 million. This allowance is available to all businesses, including unincorporated businesses and most partnerships.
Investment plays a crucial role in driving productivity growth, yet business investment has been a long-standing weakness in the UK. In 2021, UK business investment only accounted for 10.0% of GDP, compared to the OECD average of 12.5%. To address this, the UK government has implemented a competitive Corporation Tax rate, which is the lowest in the G7, along with generous investment incentives to reward businesses that invest and create conditions for sustained economic growth.
In 2021, the government introduced the super-deduction, the largest two-year business tax cut in modern British history, to encourage companies to increase their investments and bring planned investment forward as the country recovered from the Covid-19 pandemic. Full expensing builds on the success of the super-deduction by allowing companies to write off the entire cost of their investments in one go.
In a capital allowances survey conducted last year, businesses expressed a clear preference for full expensing over other options under consideration, citing its simplicity and generosity. As a result of this measure, the UK’s capital allowances regime will become a world leader. A tax information and impact note for this policy is available on the Government website.
Capital allowances are a form of tax relief available to businesses, enabling them to deduct some or all of the cost of an item from their profits before paying tax. There are several types of capital allowance, including:
- The Annual Investment Allowance (AIA), which permits businesses to claim 100% of the cost of plant and machinery expenses up to £1 million in the year they are incurred.
- Writing Down Allowances (WDAs), which spread tax deductions over time at rates of 18% and 6% per year for main rate and special rate expenditures, respectively.
- First-Year Allowances (FYAs), which allow companies to claim a portion of the cost of plant and machinery investments in the year they are incurred.
- Structures and Buildings Allowances (SBAs), which permit businesses to deduct 3% per year over a period of 33 1/3 years for qualifying expenses related to non-residential structures and buildings.
How Does Full Expensing Work?
Full expensing is a type of first-year allowance that enables companies to claim a deduction from their taxable profits equal to 100% of their qualifying expenditure in the year the expenditure is incurred. This allowance is available to companies subject to Corporation Tax, but not to unincorporated businesses. However, such businesses are eligible to claim the AIA, which provides the same benefits as full expensing for the investments it covers (up to £1 million per year).
To qualify for full expensing, the plant and machinery must be new and unused, and cannot be a car, a gift to the company, or bought to lease to someone else. On the other hand, expenditures on second-hand assets and those bought to lease to someone else can still qualify for the AIA.
For “special rate” expenditure that does not qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions as full expensing. This means that companies can claim a deduction from their taxable profits equal to 50% of their qualifying expenditure in the year the expenditure is incurred. Capital allowances can be claimed on the balance of expenditure in subsequent accounting periods at the 6% rate of WDAs for special rate expenditure.
The difference between “main rate” and “special rate” is further explained in HMRC’s guidance pages, which will be updated as soon as possible to assist businesses in determining whether their investments qualify for these allowances.
What Classes as Plant & Machinery
For the purpose of claiming capital allowances, most tangible capital assets used in a business, with the exception of land, structures, and buildings, are classified as plant and machinery. Plant and machinery that may qualify for full expensing includes, but is not limited to:
- Machines such as computers, printers, lathes, and planers
- Office equipment such as desks and chairs
- Vehicles such as vans, lorries, and tractors (excluding cars)
- Warehousing equipment such as forklift trucks, pallet trucks, shelving, and stackers
- Tools such as ladders and drills
- Construction equipment such as excavators, compactors, and bulldozers
- Some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.
The Perfect Opportunity
This provides the perfect opportunity to increase your production capacity whilst offsetting taxes; providing both short-term tax savings and long-term profitability for your business.
We are actively speaking with companies in the print, display, packaging, carton, corrugated and packaging industries this week, to see how this new announcement can best benefit their business.
GET IN TOUCH and book a call to see how we can help your business take advantage of this amazing initiative.