Chancellor of the Exchequer Rishi Sunak declared, in his budget on 3 March 2021, “the largest tax cut in Britain’s history”. He was referring to the introduction of first-year temporary capital allocations (FYAs) aimed at giving a major boost to the UK’s economic recovery from the Covid-19 pandemic. What are the first year bonuses? The basic capital allowance available to all companies is the “Main Pool” notation allowance (WDA). This allows you to deduct 18% of the asset’s cost each year over the life of the asset until you stop using it. The first year allowance (FYA) allows companies to deduct from their tax liability a percentage of the cost of qualifying capital expenditures made during the year in which the equipment was purchased. The advisor’s new temporary financial FYA provides companies that invest in eligible plant and machinery greater tax credits in the purchase tax year than would normally be available. This article was first published in the May 2021 issue of The Construction Index magazine. Register online. The new temporary public finances are: • “Premium Discount”. This allows the company to deduct 130% of its taxable profit from the value of qualifying plant and machinery that normally qualifies for the “prime pool” rate of diminishing balance of 18% annually. • “Special price” or “Saudi Riyals” allowance. This is a provision for the first year of 50% for capital expenditures on plant and machinery eligible for the “Special Price Pool”. This typically applies to integrated features in a building or structure (such as heating, elevators or lighting systems) and assets with an economic life of more than 25 years. The SAR allowance is usually 6% per annum. What about other allowances? The new temporary FYAs will be available in addition to the Current Annual Investment Allowance (AIA) which already gives a 100% exemption on eligible plant and machinery costs up to a certain value in the purchase tax year. The value limit for AIA has been set at £1 million per company for the year 2021. All types of businesses, including sole traders, partnerships and limited companies, are eligible for AIA while only limited companies can claim the new super discount and SAR allowances. What are the main conditions for the new allowances? Purchase type: Investment must be in new plant and machinery. Not applicable to eligible second-hand or used equipment businesses: FYAs are only available to businesses subject to corporate tax and do not apply to sole traders, partnerships, LLPs, or unincorporated businesses. Timelines: Public financial appointments are also available only if the purchase contract is signed after March 3, 2021 and expenditures are incurred between April 1, 2021 and March 31, 2023. If the contract and expenditures are outside these criteria, public financial approvals will not be available and expenditures will not qualify at rates. Regular for the master pool (18%) or the special rate pool (6%). Exceptions: As the higher discount and SAR allowances are first-year bonuses (ie not ‘Main Pool’), there are some specific exceptions, including any expenses on motor vehicles and on the provision of machinery and equipment acquired for rental (see ‘What about Factory-hire?’). How about renting plants? If plant or machinery is to be leased, FYs will not be available at the time of their purchase and expenses will normally qualify for regular master pool or special rate pool rates. HM Revenue & Customs (HMRC) does not distinguish between “leasing” and “hiring” but there is a specific exception relating to the provision of services that involve the use of an asset. HMRC considers the rental station provided with the operator to be a “service” and not merely a “rent”. This means that the purchase of such a plant is disqualified from FYA by excluding leasing. Example 1: Acme Tower Cranes purchases a fleet of cranes that it leases to GB Construction for use on a large project. Assuming the cranes are new and their purchase was within the relevant time period, Acme Tower Cranes can claim an additional 130% discount on their investment. This is because tower cranes are rented with a full-time operator and Acme provides a service, not equipment rental, to GB Construction. Example 2: A1 Tool Hire purchases a fleet of site dump trucks that it distributes through its warehouse network for rental to customers at a day rate. Purchase does not qualify for FYA Super Discount. This is because the equipment is not supplied to the operator and A1 is considered to be rented or leased, and does not provide a service that involves the use of the asset. How Much Tax Credit Can Businesses Get? The table below details the effective first-year tax credit for a company investing in expenses eligible for the super deduction and SAR allowances compared to the usual 18% and 6% writing allowance for investment in main pool plant and machinery and special rate pool assets. The Saudi Riyal allowance grants a 50% waiver of the qualification cost in the first year with the balance transferred to the regular special rate group to be written down at the usual 6% rate in future years. Example 1 Company A is spending £100,000 on a new telescopic handler. You placed your order on March 5, 2021 and will make the payment from April 1, 2021 to March 31, 2023. Expenses qualify for an additional 130% discount. Tax credit available for the asset in the year of purchase: £100,000 x 130% = £130,000 Tax credit for the first year at the current 19% rate of corporate tax: £130,000 x 19% = £24,700. Example 2: Company B buys the same type of telescopic handling equipment at the same price of £100,000 but before 3 March 2021. The contract is out of the 2018 financial year period, so the tax credit in the year of purchase is at the normal ‘Main Pool’ rate of 18% . Tax credit for the asset in the year of purchase: £100,000 x 18% = £18,000 Tax credit at the current 19% rate of corporate tax: £18,000 x 19% = £3420 Tax credit for the remaining balance in £82,000 (purchase price minus £18,000 Sterling tax credit for the first year) will be available as the write-off allowance is claimed on a reducing balance basis. What if I sell a qualifying asset for public financial practices? Companies must track all ultra-discount assets and SAR allowance individually until they are disposed of. For any eligible expenditures for general fiscal years, the disposition value is determined in the same way as when the asset is sold. However, the amounts incurred on the plant claimed as either a ‘Premium Discount’ or a ‘SAR Provision’ will be recognized as a ‘balancing charge’. Budget charge is the recovery of tax provisions that were granted in connection with an asset at the time of sale. For example: • A site dump truck was originally purchased for £30,000 and registered for tax purposes over a four-year period of up to £10,000. If the dump truck is then sold to a third party for £15,000, a balancing fee of £5,000 will be payable to HMRC (sales proceeds of £15,000 minus £10,000 reduced tax value). Also note that the main corporate tax rate will increase from 19% to 25% effective April 1, 2023. If the disposal of plant and machinery occurs after April 1, 2023, the fee will be subject to this higher rate of corporate tax, while the original exemption will be charged against the tax rate The current companies of 19%. Is there an annual limit to the amount that can be invested? Unlike Annual Investment Allowance (AIA) which has an annual limit applicable to a company or group of companies (currently £1m in calendar year 1 January 2021 to 31 December 2021), there is no limit or cap on the amount of capital investment that can be made It qualifies for either the additional discount or the Saudi Riyal allowance. This article was first published in the May 2021 issue of The Construction Index magazine. Register online. Plan carefully as the main rate of corporate tax increases from 19% to 25% effective April 1, 2023, and decide on the most tax-efficient mix of capital allowance claims for the 2021/22 and 2022/23 (and possibly 2020/21) taxable periods. be complex. Companies need to carefully consider the availability of current FYA and AIA when making investment decisions and planning to balance their current cash flow needs against the desire for the most tax break. Such considerations will likely require accurate forecasting of future profits and losses and capital investments to ensure that your business is making the right decisions. About the author Steve Watts is a tax partner at BDO and heads the Capital Allocations team. He is a chartered surveyor and member of the Association of Tax Technicians and has specialized in capital allocations for over 25 years. Steve advises companies on capital allocation issues across all sectors and in particular regarding the complex area of capital allowances associated with property purchases, construction and fit-out. For more information contact bdo.co.uk Got a story? Email [email protected].