What are the new temporary capital allowances?

From 1 April 2021 until 31 March 2023, companies, who are subject to corporation tax (CT), investing in qualifying new plant and machinery assets will be able to claim:

• a 130% super-deduction capital allowance on qualifying plant and machinery asset investments (that would normally qualify for 18% main rate writing down allowances)
• a 50% first-year allowance (FYA) for qualifying special rate assets (that would normally qualify for 6% main rate writing down allowances)

For information on allowances available from 1 April 2023 please see our article Full Expensing capital allowances available from 1 April 2023 until 31 March 2026.

What are qualifying assets?

Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances. There is not an exhaustive list of plant and machinery assets but HMRC suggest the types of assets which may qualify for either the super-deduction or the 50% FYA include, but are not limited to:

• Solar panels
• Computer equipment and servers
• Tractors, lorries, vans Ladders, drills, cranes
• Office chairs and desks
• Electric vehicle charge points
• Refrigeration units

Within these types of plant and machinery, some assets are classed as Special Rate assets and can also be pooled together for allowance purposes. These will qualify for the 50% FYA and not the super-deduction. Special rate pool expenditure includes:

• parts of a building considered integral - known as ‘integral features’
• items with a long life
• thermal insulation of buildings

What expenditure is excluded from qualifying?

• Second-hand asset purchases
• Cars (including zero emission)
• Contracts entered into prior to 3 March 2021
• Assets used in ring-fence trade (excluded from Super Deduction allowance only)
• Assets used for leasing (if the asset ownership cannot be transferred to the hirer)
• Incurred in a period during which the trading activity changes or ceases

How are the allowances calculated?

The qualifying expenditure is multiplied by either 130% (if it qualifies for the super-deduction) or 50% (if it qualifies for the special rate FYA) providing the period ends before 1 April 2023. 

The rate of the super-deduction will also require apportioning if a CT period in which the qualifying expenditure occurs, straddles 1 April 2023. The rate should be apportioned based on days falling prior to 1 April 2023 over the total days in the CT period:

• Divide the number of days before 1 April 2023 by the total days in the accounting period
• Multiply that amount by 30
• Add 100 to the above result

This provides the apportioned % rate to multiply by.

Example

A company buys a piece of machinery for £250,000 in the year ended 30 April 2023 which qualifies for the super-deduction allowance.

Days before 1 April 2023 = 335

Total days in the accounting period = 365

335/365 = 0.92

0.92 x 30 = 27.5

100 + 27.5 = 127.5% is the rate to multiply the qualifying expenditure by.

What happens on disposal of the asset?

Disposal receipts should be treated as balancing charges (taxable profits), instead of reducing the remaining balances (written down values) on the asset pools. However, if only part of the original expenditure is claimed for either of these temporary allowances then only part of the disposal receipt is treated as a balancing charge (in the same proportion).

Furthermore, for assets that have been claimed under the super-deduction, the disposal value for capital allowance purposes should take the disposal receipt and multiply by 130%, except where disposals occur in accounting periods straddling 1 April 2023.

If a disposal of these assets takes place in a CT period that straddles 1 April 2023, the rate is apportioned in the same way as it is for determining the amount of allowance when the asset is purchased in a straddling period:

• Divide the number of days before 1 April 2023 by the total days in the accounting period
• Multiply that amount by 30
• Add 100 to the above result

This provides the apportioned rate % to multiply the disposal proceeds by.

Practically, this means that for periods ending on or before 31 March 2023, proceeds are taxed at 130% of the amount received, whilst for periods straddling 1 April 2023, proceeds are taxed at a hybrid rate. For periods starting on or after 1 April 2023, proceeds are taxable at 100% of the proceeds received.

How will TaxCalc assist with the calculations?

When creating a new asset within the General or Special Rate Pools, TaxCalc provides tick-boxes for you to indicate if the asset qualifies for the Super-Deduction 130% or Special Rate FYA 50%.

When either of these boxes are ticked, the system calculates and populates the full allowance available. It is possible to over-write the amounts, if only part of the allowance is going to be claimed. The remaining balance* will be added to 'Additions qualifying for AIA' . If no AIA is claimed, the balance is taken to the 'Balance to WDA'. 

* in the case of a super deduction asset, the remaining balance is calculated based on the proportion claimed not the full amount available to claim (130%). For example a qualifying asset costing £10,000 will have an uplift of 30% added (£3,000) to provide 130% (£13,000) available to claim. If only £11,000 is claimed as a super deduction, this equates to 84.6% of the full amount available of £13,000. Therefore the remaining balance for claiming other allowances will be 84.6% of the £3,000 uplift.

When disposing of an asset on which the super deduction or the 50% FYA has been claimed, Taxcalc provides a wizard on the disposal proceeds box:

Existing assets belonging to the general or special rate pool can be added into the wizard screen and a disposal proceed amount can be entered:

A super deduction type asset will have a balancing charge calculated, based on the disposal rules explained above. All other pool asset will only incur a balancing charge if there is no written down value remaining.

If the business has ceased, any balancing allowance due can be entered manually onto the capital allowance grid.