Posted: 11th March
Budget 2021: ‘Super Deductions’ for capital allowances a welcome boost for the sector
The Chancellor has unlocked significant cash reserves through increased capital allowances tax relief. It is anticipated that this initiative will result in savings of £20-30 billion over the next few years for the sector and will stimulate more immediate investment in future projects.
Whether this takes the form of facilitating project viability, or encouraging clients to bring projects forward, the savings, which can be intrinsically linked to project and equipment expenditure, will no doubt provide an important catalyst to increase construction expenditure. Certainly, increased cash flow and permanent savings will aid business confidence, which is very much needed at this juncture.
This stimulus will provide huge savings across all sectors and especially those industries which have a high plant intensity such as manufacturing and utilities, and buildings such as offices, hotels, and leisure. The savings are, of course, are open to all UK tax-paying companies that incur capital expenditure on commercial buildings through new builds, extensions, refurbishments and fit-outs.
Companies will be able to claim these capital allowances in the form of 130% super deductions for general plant and equipment, along with a new first year allowance, which will be available for all integral feature assets at 50% in the first year. Furthermore, the recently extended annual investment allowances tax relief of £1m per annum will remain in place to provide additional tax relief this calendar year.
This investment opportunity may provide several dramatically different financial profiles for clients from those in place pre-Budget, for example, if £5m is spent on qualifying assets, £6.5m could be claimed, resulting in immediate tax relief savings of approximately £1,250,000 (25% of cost). Previously, claims could only be made on general plant at 18% per annum over several years. But with this new level set at 130%, the full amount and more is deductible when the relevant expenditure is incurred.
Integral feature assets, which comprise most higher value mechanical and electrical assets in buildings also provide the opportunity to make significantly increased claims. For example; again if £5m is spent on qualifying assets, £2.5m could be claimed immediately resulting in savings of approximately £500,000 (10% of cost). Ordinarily, claims could only be made at 6% per annum over many years, whereas now, 50% can be claimed in the year of expenditure.
Both the examples above are enhanced by and work collectively with the annual investment allowance of £1m per annum, which could provide further immediate savings for qualifying assets of approximately £190,000.
This additional tax relief relates to new building and equipment expenditure (not second hand) incurred post 1 April 2021 and for contracts entered into after 3 March 2021, with savings identified assuming a current 19% tax rate.
If you would like to discuss any of the issues raised here, please get in touch.
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