The Government is clearly set on encouraging UK companies to begin investing as soon as possible by providing significant, time-limited enhanced tax reliefs for expenditure on qualifying assets. The value of these are likely to be further boosted for some businesses when considered alongside the announcement of an extension of the trading loss carry back provisions from one to three years.
Headlining the enhanced reliefs is a new 130% super-deduction for companies incurring expenditure on main rate plant or machinery, together with a 50% first year allowance for special rate expenditure, which are estimated to be worth around £29bn in tax relief over a four-year period and will apply to qualifying expenditure incurred between 1 April 2021 and 31 March 2023. Other measures include a one year extension of the £1m Annual Investment Allowance and an acceleration of relief for companies investing in eight new Freeport tax sites.
It will be important for companies to model the impact of these reliefs alongside broader changes to the corporation tax regime. For example, some businesses might wish to carry back losses created by the temporary first-year allowances, others may choose to claim in full to create losses to be carried forward to set against the 25% tax rate in 2023 (subject to loss restriction rules), and others may choose to claim writing-down allowances instead, to increase flexibility.
The new 130% “super-deduction” for main pool plant and machinery expenditure incurred by companies provides not only complete first-year tax relief but an extra deduction of 30% of the investment. This equates to a tax value of nearly 25p for every £1 of expenditure. In addition, for special rate expenditure, a 50% first-year allowance will effectively provide for ten years of writing down allowances in the first year (the “SR allowance”).
HMRC have clarified to us the policy intention to include long-life assets within the 50% first year allowance for special rate expenditure, but to exclude all leased assets from this and the “super-deduction”, thereby affecting all equipment lessors. However, it is expected that assets provided for leasing within a property lease should generally qualify for the super-deduction and SR allowance where such assets constitute “background plant or machinery”. Broadly speaking, background plant and machinery constitutes assets that are typically installed in a variety of buildings of different types (i.e. not specialist equipment), and would cover the majority of the plant and machinery fixtures in most property leases (e.g. mechanical and electrical systems). On this basis, the majority of expenditure on the provision of such plant and machinery fixtures would be likely to attract the enhanced reliefs (to the extent all other relevant conditions are satisfied).
Whilst this stimulus is very welcome, careful consideration will be required to ensure that the benefits are appropriately balanced against the application of other reliefs. This is especially important in light of the complex nature for clawing-back relief on the disposal of assets where the new first year allowances have been claimed, and the additional administration required to track individual assets. The interaction of the super-deduction with existing reliefs such as RDEC are also very complex, particularly in relation to large scale Software implementation projects and careful up front consideration would be required to optimise the relief relating to such expenditure.
As we saw with the introduction of the Structures & Building Allowances (“SBAs”) in 2018, a key challenge for some businesses could be identifying the relevant contract date, for the purposes of the commencement provisions. We also note that these commencement provisions are subtly different to the SBAs regime. This could be particularly challenging for businesses with significant annual capex investment.
The extension to the temporary annual investment allowance limit applies to expenditure incurred on the provision of plant and machinery from 1 January to 31 December 2021 (the limit was previously due to revert to £200,000 on 1 January 2021). Again, consideration will be required to determine the optimal application of the AIA alongside the other enhanced reliefs available.
Finance (No 2) Bill 2019-21 provided our first view of the proposed legislation to bring into effect the accelerated capital allowances relief for businesses investing in the eight new designated Freeports. The measures provide 100% first year capital allowances for expenditure on the provision of new plant and machinery intended for use primarily within the Freeport tax sites, together with an enhanced 10% rate of SBAs, which will write-off the expenditure incurred on the construction or acquisition of structures and buildings within a Freeport tax site over a 10 year period. Both reliefs apply to expenditure incurred on or before 30 September 2026. It is important to note that non-corporates and non-trading activities are excluded from the scope of the enhanced plant and machinery allowances (e.g. property rental businesses and equipment lessors). However, unlike the enhanced Freeport plant and machinery allowances, it appears that the enhanced structures and buildings allowances will also be available to lessors and income taxpayers. Commencement provisions restrict the application of the relief to expenditure incurred post designation of the relevant areas as Freeport tax sites. Therefore, care will be required in determining whether the expenditure falls within the commencement provisions and whether it has been incurred within the boundaries of the designated tax site.
In light of the impending changes, companies may want to start considering the following now:
• With a wider choice of capital allowances claims available, the new three-year loss carry back rules, prevailing loss carry forward restrictions and a 25% rate of corporation tax on the horizon, modelling will be key to working out the optimal position; particularly, for companies generating tax losses.
• Projected capex plans and the extent to which these enhanced incentives could apply, and the nature of future expenditure that could potentially qualify.
• Linked to the above, and in light of the commencement provisions, businesses should consider their contracting and procurement arrangements; particularly those that procure assets through framework and MSA-style contracts.
• Compliance and administration requirements could increase due to any balancing charge disposal clawback mechanism for assets subject to temporary first-year allowances. This will require additions to be tracked separately from those that will be disposed of from asset pools.
• Any deferred tax implications.
We continue to have a dialogue with HMRC around policy intent, the impact on particular sectors, and how they intend to apply a number of the measures in practice. We will keep you updated with further insights.
Should you wish to review our wider analysis of the Budget announcements, please follow the link here.