Category: Capital allowances

The Structures and Buildings Allowances (SBA) facilitates tax relief for qualifying capital expenditure on new non-residential structures and buildings. The relief applies to the qualifying costs of building and renovating commercial structures.

The relief was introduced in October 2018 at an annual capital allowance rate of 2% on a straight-line basis. From 1 April 2020, the annual rate was increased to 3% and the corresponding period reduced to 33 and one third years.

HMRC’s internal manuals consider the meaning of qualifying capital expenditure for this tax relief. The manuals state that:

The amount of qualifying capital expenditure will depend upon whether the person who first uses the building constructed it themselves, or they acquired it unused from a developer. That amount is determined either directly from expenditure incurred on the construction of a building, or by comparing those costs with the sum paid for the relevant interest in the building.

From the total ‘qualifying expenditure’, any amounts that qualify for other capital allowances or are specifically disallowed must be removed. The qualifying expenditure does not change, even when the ownership of the building changes, there are exceptions relating to VAT liabilities and rebates.

Are you thinking of investing in new plant or other equipment? Remember that the super-deduction offering 130% first-year tax relief is available to companies until March 2023.

The super-deduction tax break was introduced on 1 April 2021 and allows companies to deduct 130% of the cost of any qualifying investment on most new plant and equipment that would ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 a business invests they can reduce their tax bill by up to 25p. The temporary tax relief applies on qualifying capital asset investments until 31 March 2023. 

The super-deduction is designed to help companies finance expansion in the wake of the coronavirus pandemic and help to drive growth. 

In addition, an enhanced first year allowance of 50% on qualifying special rate assets has also been introduced for expenditure within the same period. This includes most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. 

The measures have effect in relation to qualifying expenditure from 1 April 2021, and exclude expenditure incurred on contracts entered into prior to Budget Day, 3 March 2021.

Capital Allowances are the deductions which allow businesses to secure tax relief for certain capital expenditure. Capital Allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable to Corporation Tax.

The Capital Allowance legislation does not specifically define plant and machinery (P&M). However, there is legislation that makes it clear that most buildings, parts of buildings and structures are not P&M. 

An interesting case dating back to 1982 helps to confirm this point of view. The decided case concerns a company that spent money on décor items such as light fittings and wiring as well as decorative items such as wall plaques, tapestries, murals, prints and sculptures. It was accepted that electric wiring was part of the fabric of the building but not the other decorative assets. 

HMRC’s internal guidance states that inspectors should only accept that items of decor are plant if the taxpayer can show that:

• the trade involves the creation of atmosphere/ambience and in effect the sale of that ambience to its customers; and
• the items on which plant or machinery allowances are claimed were specially chosen to create the atmosphere that the taxpayer is trying to sell.

For example, a painting on an accountant’s office wall that is owned by the accountant is not plant because selling atmosphere is not part of an accountant’s business.

There are special rules that must be followed when you sell an asset on which capital allowances have been claimed. Capital allowances is the term used to describe the tax relief businesses can claim on certain capital expenditure and thereby reduce the amount of taxable profits.

The sales value is usually the sales price. If you gave the asset away, stopped using the asset or sold it for less than it was worth then the market value should be used.

If you originally claimed 100% tax relief on the item, the business is required to add back the difference to their taxable profits. This is known as a balancing charge. A balancing charge is effectively a way of ensuring that a business does not claim more tax relief than they were entitled to on the purchase of a business asset. The balancing charge works in the opposite way to a capital allowance and increases the amount of profit on which tax is due.

If you originally used writing down allowances, you may have a balancing allowance or a balancing charge.

There are special rules for dealing with any balancing charges or balancing allowances where a business ceases to trade.

There is good news for those businesses who are looking to expand their business and invest in the assets of their companies. The government has announced that the temporary Annual Investment Allowance (AIA) cap will be extended for a further 12 months until 1 January 2022.

Annual Investment Allowance (AIA) could be claimed on plant and machinery, Integral features, and fixtures

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Plant and machinery include:

• items that you keep to use in your business, including cars
• costs of demolishing plant and machinery
• parts of a building considered integral, known as ‘integral features’
• some fixtures, for example, fitted kitchens or bathroom suites
• alterations to a building to install other plant and machinery – this does not include repairs
• Claim repairs as business expenses if you’re a sole trader or partner – deduct from your profits as a business cost if you’re a limited company.

Integral features include:

• lifts, escalators, and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

Fixtures include:

• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems

The government says that this move is intended to boost confidence as companies look to weather the pandemic and plan for the future. This should also encourage investment in qualifying plants and machinery over the next 12 months.

The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery to be deducted from your profits before tax. The relief is normally capped at £200,000 per annum but was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020.

This increased temporary limit is a generous allowance and should cover the annual spending of most small and medium-sized businesses. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures, and computers. The AIA does not apply to cars.

The extension in the temporary limit means that businesses thinking of incurring large items of capital expenditure will now have additional time to consider their options during these uncertain times. There are complex transitional rules so the timing of any purchase should be carefully considered.

If you would like to know more about it, feel free to contact us.

The Annual Investment Allowance (AIA) is an allowance for plant and machinery, tools and equipment meaning a business can write off 100% of qualifying capital expenditure against taxable profits for the same period. AIA is an incentive for businesses to invest because it accelerates the tax relief available, so it can all be claimed in the year of investment, rather than over a number of years, helping a business’s cash flow.

The relief is normally capped at £200,000 per annum but was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020.

https://www.gov.uk/government/publications/temporary-increase-in-the-annual-investment-allowance/temporary-increase-in-the-annual-investment-allowance

This means that there is now just over two months left to take advantage of the increased limit. If you are thinking of incurring large items of capital expenditure for your business (over £200,000), the timing of such a move should be carefully considered. There could be a significant tax advantage if you accelerate plans, where possible, to incur expenditure before the end of the 2020.

There are transitional rules for businesses whose accounting periods span the operative date of any changes. If the basis AIA changed in the period for which a claim is being made, the AIA must be time-apportioned accordingly.

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The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

A claim for AIA must be made in the period the item was bought. This date is defined as the date when a contract was signed – if payment is due within 4 months of the contract being signed – or the actual payment date if it’s due more than 4 months later.

As always, it is important to consider commercial, cashflow and other matters as well as the tax effects. If you are contemplating a large capital purchase please call so that we can help you decide on the best-fit planning opportunities.

 If you are looking to know more about this, feel free to book a free consultation with us.