How manufacturers can utilise capital allowances

The capital allowances regime for companies is currently quite generous and offers significant tax savings for companies in industrial sectors investing in plant & machinery.

Capital Allowances are available instead of depreciation (which is in almost all cases not an allowable deduction for tax purposes). The standard rate of relief is 18% per year, or 6% for certain categories of ‘special rate assets’ including utilities and other integral features in buildings as well as solar panels and thermal insulation. The better tax reliefs however are the Year 1 allowances which companies can claim in the year when expenditure is incurred. The Annual Investment Allowance (AIA) offers 100% deduction for qualifying expenditure in the year it is incurred and it is now set at a generous limit of £1 million per year. This is plenty for most businesses but larger companies & groups can quickly exceed this, especially as the AIA has to be shared within a group and between connected companies.

Even more generous than the AIA, was the fairly short lived ‘Super-deduction’ which lived up to its super moniker as it offered 130% relief for qualifying main rate expenditure, albeit with a few exceptions (for instance purchases have to be new and unused assets, a condition that doesn’t apply to AIA), and unlike the AIA this relief was uncapped. It was available for expenditure between April 2021 and March 2023, though potentially reduced in the last period due to phasing out rules. It was more generous than AIA but didn’t apply to special rate assets, which only got 50% first year allowances. Although this is no longer available for current expenditure, make the most of this relief by maximising claim for accounting periods which are still open.

Since April 2023, the Super Deduction has been replaced by the new ‘Full Expensing’ regime, which is essentially the same as the super deduction, just without the ‘super’ bit as it is a 100% relief rather than 130%. Like the super deduction, the relief is unlimited, so even where companies and groups exceed the Annual Investment Allowance limit, they can still carry on claiming 100% on qualifying main rate expenditure, with the 50% first year allowance continuing for expenditure on special rate assets.

With the multiple different capital allowances reliefs and transitional rules added to the mix, it can all get quite complex and so it is more important than ever to get a proper review of your capital expenditure to make sure you are maximising capital allowances.

For companies in industrial sectors, this offers significant opportunities to accelerate tax relief on machinery and equipment purchases, however it isn’t just purchases of machinery and other equipment that businesses can claim capital allowances on. If you are doing a factory or office refurbishment or maybe an extension, then capital allowances should be available on some of this expenditure, and the relatively new Structures & Buildings Allowance will typically be available where expenditure doesn’t qualify for other allowances, albeit at a much lower annual rate.

It is also important to consider capital allowances when you are purchasing new premises or selling existing property, as this generally require a negotiation between the buyer and the seller to agree the disposal value of the qualifying expenditure to ensure you maximise the capital allowances you are entitled to. You will need to ensure also that elections are entered into to fix the capital allowances value, and any other necessary paperwork is completed at the time of the transaction.

With the increase in the corporation tax rate to 25% for most companies from April 2023, capital allowances reliefs result in significantly higher tax savings, so it is more important than ever to ensure you get good advice to get the most tax efficient outcome for your business.