The landscape of capital allowances has undergone significant changes, particularly with the introduction and subsequent alteration of the super deduction. This article aims to shed light on these changes and their implications for Small and Medium Enterprises (SMEs).
In her recent webinar, Corporate Tax Update for SMEs, Emma Rawson looked at the capital allowance changes and what all these changes mean for SMEs, including the potential pitfalls and problems they could encounter.
Introduced in April 2021, the super deduction was a temporary measure designed to stimulate capital expenditure by businesses. It allowed companies to claim an enhanced deduction of 130% on qualifying plant and machinery investments. The rationale behind this was to encourage businesses to make capital expenditures before the tax rates increased to 25%.
However, as of April 2023, the super deduction has been scaled back. The government's intention was to ensure that businesses would always get a 25% tax saving on super deduction expenditure, rather than potentially saving more than 25% due to the uplift being available at the new tax rate.
This change has implications for SMEs. If you've claimed super deduction on any asset in the last three years, you need to keep track of that asset. When you come to sell it, a special balancing charge arises on super deduction or special rate allowance assets. This standalone balancing charge is calculated by taking the proportion of expenditure on which you claimed the super deduction and multiplying it by the disposal value.
Another significant change is the introduction of full expensing. This applies to new and unused plant and machinery acquired between the 1st of April, 2023, and the 31st of March, 2026. Businesses can deduct the full cost for main rates, 50% for special rate expenditure in the year of purchase. However, it's worth noting that this doesn't cover anything more than the Annual Investment Allowance (AIA) does.
The AIA limit is now permanently set at 1 million pounds, covering 99% of business plant machinery expenditure in the UK. For most SMEs spending under a million pounds, claiming the AIA might be more beneficial. Once you've claimed the AIA, you don't need to keep track of the assets and worry about balancing charges.
While these changes to capital allowances may seem complex, they are designed with a certain logic in mind. For SMEs, it's crucial to understand these changes and adapt their financial strategies accordingly. Whether it's deciding between claiming the AIA or navigating the new rules around super deduction, SMEs must stay informed to make the most of these allowances.
To watch the full session, please click here. In this session, Emma covers the following topics,
- Back to the future – the new CT rates and marginal relief
- Associated companies and how to spot them
- Capital allowances changes – what do these mean for SMEs?
- What’s going on with R&D relief for SMEs?
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.