Alarmingly the clocks have already gone back, Guy Fawkes has been burned for the 419th time, we’ve maxed out our credit cards in Black Friday sales, and the country’s Christmas Markets are selling unseemly quantities of gluhwein and bratwurst to, well, me.
As for Capital Allowances? Well, while we all knew from the outset that the Super Deduction would age like a Norwegian Blue, nevertheless it’s easy to have been taken by surprise by the speed with which it has ceased to be.
Super Deduction
A quick refresher: the Super Deduction gave 130% relief for investments in main pool plant. A parallel ‘SR Allowance’ was a 50% First Year Allowance for Special Rate Pool plant where relief reverts to the standard 6% Writing Down Allowance from year two onwards – though in many cases it remained optimal to allocate the Annual Investment Allowance (AIA) against any Special Rate Pool additions for a 100% deduction.
Both enhanced allowances were available for investments made between 1 April 2021 and 31 March 2023. Designed to remove the disincentive to invest that had been created by the increase in Corporation Tax rate, the Super Deduction and the SR Allowance were restricted to relief against Corporation Tax. This meant that smaller unincorporated businesses were locked out from accessing this incentive.
It’s important to note that transitional arrangements were baked-in from the start: for Accounting Periods that span 31 March 2023, the headline rate of 130% is replaced by a “Relevant Percentage” that steps down the relief on offer. For a company with a year ending 31 December 2023 for example, the deduction is reduced to 107.40%.
Full Expensing
The sequel to Super Deduction is called Full Expensing. The regime was announced in the Spring Budget on 15 March 2023, with effect from 1 April 2023. It was initially to be in place for three years, until 31 March 2026, with the Chancellor stated his “intention to make it permanent as soon as we can responsibly do so”.
In an astonishing example of a politician making good on a promise, Full Expensing was made permanent in the Autumn Statement on 22 November. While the next three years will include a General Election, the Shadow Chancellor Rachel Reeves has indicated support for investment incentives, so it feels reasonable to count on this policy being here to stay.
This is good news!
Under Full Expensing, Special Rate Pool expenditure continues to attract a 50% First Year Allowance. This continuation of the SR Allowance hasn’t been given an official name – not even one as clunky as “SR Allowance” – but it operates identically.
As for main pool plant, Full Expensing is a First Year Allowance. This means it’s closer in conception to an expense adjustment than a Capital Allowance and permits businesses (again incorporated ones only) to write off an asset’s full cost in year one.
In practice, Full Expensing operates as an in-year relief and must be claimed in the return for the year of expenditure. Importantly, this means that if costs aren’t itemised promptly and treated correctly in the accounts and tax computations, then there is no opportunity to access the 100% relief in future years.
First Year Allowances are a stark deviation from the usual mechanics of Capital Allowances, where retrospective claims can be made in any open tax year so long as the underlying assets are still owned.
Historically, many taxpayers have taken a relaxed approach to their Capital Allowances analyses, reviewing expenditure only once all costs are finalised, all accounts are signed off and audited, holidays are out of the way, and accounts staffing capacity has returned to normal after busy season.
If this foreshortened window of opportunity is missed however, the rate of relief reverts from 100% in year one to the standard writing down allowance of 18% on a reducing balance basis (or from 50% to 6% for Special Rate) – a hefty cashflow penalty for not getting your Capital Allowances act together in time, and one that may catch many unawares.
There’s now a clear need to bump Capital Allowances higher up the agenda and address the analysis of expenditure closer to real-time. Routine accounting processes should be rethought to make sure information flows are established in plenty of time for the cost analysis to be carried out to the robustness and granularity demanded by HMRC.
Freeports and Investment Zones
A flagship policy capitalising on the post-Brexit liberalisation of state aid, Freeports were launched in 2020 as a cornerstone of the wilfully nebulous “levelling up agenda”. Welsh Freeports and Scottish Green Freeports followed, as did the concept of Investment Zones, introduced in the infamous KamiKwaze mini-budget of September 2022. Jeremy Hunt retained but refocussed Investment Zones in a push to create high-growth industrial clusters centred on universities.
Each of these special tax sites are tied to a geographical location and come with a combination of enhanced tax and investment incentives, including in many cases accelerated Capital Allowances. Confusingly, each of the sites came into force on its own date, yet the policy envisaged a five-year horizon for each, and gave the policy a sunset date of 30 September 2026.
While 2026 felt like a long way off, it was a tight deadline for the intended incentivising effects to be realised: getting a new facility designed, built and paid for in time would have meant putting together financing packages, navigating the planning process and completing the build phase – all in under three years.
Thankfully an amendment in 2023’s second Finance Act granted the Treasury the power to delay this expiry date, and this power has now been used. In an announcement made at the launch of the West Yorkshire Investment Zone on 20 November the Chancellor extended the life of IZs to 10 years (with the extension for Freeports to be agreed on a case-by-case basis).
A lot can happen in politics in a short space of time, but business planning horizons are much more than a year ahead, investments always take longer to realise than the most optimistic predictions, and the best thing any government can do to foster business success is to be predictable. I’ve been saying that for decades, and maybe it’s finally gaining some traction.
