Budget 2021 Produces Surprise Bonus for Limited Companies
Limited companies who are going to make significant capital investments over the next two years will welcome the news that they will be entitled to claim a super-deduction of 130% for qualifying capital expenditure. Rishi Sunak announced in the Budget that under the current legislation a company spending £10m would achieve tax relief of £2.6m in the year of expenditure. However under the new rules they would achieve a tax relief on £13m under the new rules.
Whilst many of us predicted that there may be further allowances available for green investment and forecast a rise in corporate tax rates, there is now a real focus designed to stimulate business investment.
So how will the new super-deduction work? The new measure is only temporarily being introduced for two years for expenditure from 1 April 2021 to 31 March 2023. This will allow a 130% deduction for investments which would normally qualify for 18% plant and machinery writing down allowances. The new rules also allow for a first year allowance of 50% on special rate pool expenditure (which normally only attracts 6% writing down allowances).
This is therefore a significant increase and acceleration of tax relief for many companies that would currently achieve 100% tax relief on the first £1m of spend. This could be particularly beneficial for those companies benefitting from an extended loss carry-back period and generate significant corporation tax refunds.
There will be a number of exclusions including contracts entered into before 3 March 2021 even if expenditure is incurred after 1 April 2021.
It is interesting to note that the new super-deduction is only available to companies within the charge to corporation tax. Unincorporated businesses cannot benefit under this new rule and will continue to be able to claim the capital allowances at 100% of up to £1m under the annual investment allowance. The annual investment allowance had previously been extended for another year until 31 December 2021 when it is due to revert back to £200,000. This is when some unincorporated businesses may notice a wide gap in the timing of tax relief as expenditure in excess of this would only achieve relief at either 18% or 6%.
Freeports – capital allowance announcements
Businesses incurring qualifying expenditure on plant and machinery for use in freeports will be able to qualify for 100% enhanced capital allowances until 30 September 2026. This will enable 100% tax relief to be achieved for substantial capital spend after the super-deduction ends in March 2023.
Freeports will also benefit from an enhanced rate of structures and buildings allowance (SBA) available for businesses on qualifying expenditure on new non-residential structures and buildings constructed in freeport tax sites. Ordinarily tax relief is achieved at 3% per annum, but freeports can benefit from a 10% straight line tax deduction, effectively achieving full tax relief on the cost of the building after only 10 years.