The Chancellor has announced ‘full expensing’ for some types of plant and machinery for companies paying Corporation Tax. This move was widely predicted – in large part because the Treasury leaked it last week. Partly this was to avoid any Kwasi-style economic shocks, and partly to allow room to row back if it didn’t land well.
Full expensing means that the total cost of the qualifying asset can be offset against tax in the year it was bought. This will go some way to easing the Corporation Tax rate increase, and provides an effective 25% cut in the cost of investments.
Available from 1 April 2023, full expensing acts as a replacement for the popular Super-Deduction that gave a 130% first year allowance, but was scheduled to expire at the end of March.
Special Rate assets, such as solar panels and other plant integral to a building, are given a 50% first year allowance. This move effectively continues the temporary SR Allowance that ran in parallel to the Super-Deduction.
The usual exclusions apply for leased assets as the Treasury try to ensure the tax relief is given to the entity that bears the true cost of the investment. Otherwise there doesn’t seem to be much targeting here, particularly as these enhanced reliefs follow on from last summer’s consultation on how relief could best be targeted! For such a broad-brush measure it feels odd to restrict the relief to companies only, thereby excluding unincorporated businesses from accessing this investment incentive.
Full expensing and the 50% Special Rate FYA will be with us for the next three years, with the Chancellor stating his “intention to make it permanent as soon as we can responsibly do so”. The Shadow Chancellor has previously indicated a support for investment incentives, so it feels reasonable to assume that these policies are here to stay.
No surprises are hidden in the detail issued on Budget day itself, though of course the full text of the Finance Bill has yet to be released, and will doubtless conceal some transitional arrangements and other details lying in wait to trap the unwary.
Annual Investment Allowance
Setting the Annual Investment Allowance (AIA) at a permanent £1m is the sole survivor of the KamiKwasi mini budget, a policy that has now been restated by Jeremy Hunt. This will provide 100% first-year relief for plant and machinery investments up to £1 million, and would otherwise have reverted to its previous level of £200,000.
The extension of the AIA is a welcome clarification, as much for the certainty it offers as the quantum of tax relief given. It will of course be of limited impact for the duration of full expensing, as it will only benefit unincorporated businesses or companies buying Special Rate assets.
Twelve new Investment Zones have been announced, in a ‘refocussing’ of an existing policy. Locations are intended to be spread across the UK, with a commitment to provide at least one IZ in each of Scotland, Wales and Northern Ireland. We will know final locations by the end of 2023.
Each Zone will be able to choose its own mix of tax relief and grant funding. The tax reliefs available to IZs are aligned with those in Freeports so the two programmes can work coherently alongside each other. Tax incentives will last for 5 years.
Among other incentives are Enhanced Capital Allowances: 100% first year allowance for companies’ qualifying expenditure on plant and machinery assets for use in tax sites. Clearly the attractiveness of this element has been eroded by the advent of full expensing.
Enhanced Structures and Buildings Allowances are still available, to increase SBA to 10% of the cost of qualifying non-residential investment per year, meaning buildings can effectively be written off over 10 years.
It is worth emphasising that full expensing is a Corporation Tax relief. This means that unincorporated businesses will be unable to benefit. Unless they are able to use the Annual Investment Allowance, standard Writing Down Allowances of 18% and 6% will apply. This is a significant penalty with no clear purpose.
As generous as full expensing is (to companies), it is unambitious in its scope. There is little targeting of the relief, and disappointingly there has been no take-up of any of the suggestions made in responses to the consultation.
Where for example is the green incentive? Since the withdrawal of the Enhanced Capital Allowance (ECA) regime in 2020, there has been no tax allowance to encourage environmentally friendly investment. Replacing boilers with heat pumps will be more affordable with a boosted tax break to help offset the upfront cost.
Thinking more widely, this budget could have been an opportunity to showcase some innovative ideas that encourage the reuse and repurposing of existing building stock, to counteract the VAT anomaly that favours new construction over recycling the UK’s existing building stock.
With housebuilding in England predicted to fall to its lowest level since the second world war, why persist with the refusal to give Capital Allowances for residential properties? This would be a radical move that would require a deeper rethink of how Capital Allowances are given, but coupled with an environmental focus, a well-designed policy could offer real incentives to homeowners to upgrade their properties with retro-fitted insulation, solar panels and heat pumps.
Sticking with the residential theme, Land Remediation Relief should have been extended to include the costs of replacing flammable cladding on tall buildings. Almost six years on from the Grenfell disaster, thousands of buildings are still fitted with dangerous flammable cladding, with landlords, residents and the government all hoping someone else will foot the bill for the repairs. Including this work in the scope of Land Remediation Relief would be an simple and easy amendment to existing and well-understood legislation, and would have shown some much-needed leadership and creative thinking on how to move towards a solution.
Another aspect of Land Remediation Relief should have been extended to Capital Allowances. Loss-making companies are locked out from Capital Allowances, and it can be many years before any tax relief is of use. Land Remediation Relief can be surrendered in exchange for a payable tax credit. This was actually a valuable aspect of the withdrawn ECA scheme, and applying a similar idea more widely to Capital Allowances would allow entrepreneurial start-ups to access these investment incentives – exactly the sort of businesses that are key to providing economic growth and resilience.
To find out more about what we do, please get in touch.