Tax incentives for capital investment

Jun 22, 2023
Aaron is one of our tax partners, Aaron specialises in R&D Tax Relief, VAT, Trusts, Corporate Tax, Business Tax and Capital Gains Tax.
Capital Investment Tax Incentives

Super deduction and Annual Investment Allowance

The introduction of the super deduction from April 1, 2021 was beneficial to capital-intensive industries such as logistics in that it provided companies with a deduction from taxable profits equal to 130% of the cost of qualifying brand new plant and machinery (ex- cluding cars). This gave an effective rate of tax relief of 24.7% based on the 19% rate of corporation tax that was in force.

However, the super deduction was a temporary measure and expired on March 31, 2023. In addition, the annual investment allowance (AIA) limit which provides 100% relief for qualifying expenditure was set to reduce from its temporary £1m limit to £200,000 on April 1, 2023.

Corporation tax

Given the increase in the rate of corporation tax to 25% from April 1, 2023 many logistics businesses were rightly concerned about the impact of this increased rate on capital investment against the background of rising costs.

If the government was not going to take any action, this would have left logistics business with a capital allowances regime which was not providing adequate incentivisation.

Full Expensing

However, the Spring Budget brought welcome news on this front as the government announced Full Expensing, a 100% First Year Allowance (FYA), which allows companies to deduct the cost of qualifying plant and machinery from their profits straight away with no expenditure limit. Qualifying expenditure will include most plant and machinery, as long as it is unused and not second-hand, but will not include cars. Full expensing will be effective for acquisitions on or after April 1, 2023 but before April 1, 2026. The impact of full expensing is that companies will get tax relief at an effective rate of 25% in the year of purchase.

A 50% FYA for other plant and machinery including long-life assets and integral features (known as special rate assets) will operate along similar lines. Full expensing and the 50% FYA are only available for companies and not for unincorporated businesses.

In addition to this, the government have announced that the annual investment limit will remain at £1m and that this limit will be made permanent.

Given rising costs and pressure to invest in more efficient and environmentally friendly vehicles the introduction of full expensing and permanent introduction of the £1m AIA limit will hugely benefit the logistics sector.

Article available on All Things Business.

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