Capital Allowance – Explained

The budget presented by The Chancellor of The Exchequer to The House Of Commons on 3rd March 2021, included a significant new tax allowance for the purchase of certain types of plant and machinery for many businesses. The new allowance is known as super-deduction and became available from 1st April 2021.

Super-deduction is the latest addition to a range of allowances available

Capital allowances are a method of reallocating the taxable benefit of an asset over time. The rules are set by HMRC and for tax purposes any depreciation charge shown within accounts prepared by a business is added back into net profit and replaced by an allowable capital allowance. A capital allowance is the sum of money a UK business can deduct from pre-tax profit to reduce corporate or income tax.

From 1st April 2021 until the 31st December 2021 there are three types of capital allowance available. Although not every business or equipment type will qualify for each allowance, details of each allowance are as follows:-

Writing Down Allowance (WDA)

The permanent scheme for claiming capital allowances is the standard writing down allowance which allows businesses to write off the cost of an asset for tax purposes over the period it is being used. Writing down allowances are available for all new and used equipment and can be claimed by any tax-paying business.

Annual Investment Allowance (AIA)

From 2006 an enhanced scheme for capital allowances has been available, known as the Annual Investment Allowance. It allows businesses to acquire a certain amount of capital equipment each year (£1,000,000 in 2021) and claim the full allowance in the tax year that the equipment was purchased.

Super-deduction

Available from 1st April 2021, super-deduction is the most attractive capital allowance scheme to date. It has been introduced to generate a significant increase in capital allowances by UK corporations ahead of a planned increase in corporation tax from 19% to 25% on 1st April 2023.

As with the Annual Investment Allowance, the super-deduction scheme brings forward all allowances that can be claimed to the year in which the qualifying asset is bought, but allows the claim to be based on an amount which is 30% higher than the purchase price of the asset (see table below). Whilst the scheme is time-limited, there is no financial cap on the amount of equipment that can be subject to super-deduction and the allowance can be applied to both outright purchase and equipment acquired through hire-purchase agreements.

Who and what qualifies for each allowance?

The table below illustrates the three capital allowances that are in place during 2021:

Any HMRC approved capital allowance will result in a tax saving equivalent to the marginal rate of tax paid by a business. Corporation tax is paid by all UK businesses at a current rate of 19%. Individuals trading within a partnership or as a sole-trader will pay income tax at the appropriate rate.

The tables below are examples of the tax savings which might be possible through the three HMRC approved capital allowance schemes for both hire purchase and outright purchase.

These examples show tax savings available based on the current corporation tax rate of 19%. An increase in corporation tax is planned for 1st April 2023 and as such the tax relief illustrated below will increase from that date for many limited companies.

Please note the above examples are for illustrative purposes only. BNP Paribas Leasing Solutions is not authorised to provide tax advice. Appropriate professional advice should be sought when assessing the tax implications of any investment decision.

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