The upcoming changes to UK Capital Allowances

How is the UK’s Capital Allowance Regime changing?

The government recently announced its intention to consider a variety of ways in which it could extend the scope of tax reliefs available to anyone investing their capital in the UK.

Details are still to be finalised and brought into effect, but we know super deductions are set to end and the Annual Investment Allowance (AIA) is due to be rolled back to £200,000 per year from April 2023, which has led to expectations that the UK’s capital allowances regime will undergo a substantial overhaul.

Adjustments to the AIA

The AIA currently allows for tax reliefs in relation to capital investments up to £1 million a year, which has, since January 2019, represented a significant incentive for SMEs looking to spend money on plant facilities and machinery. Indeed, for many businesses, this incentive has been instrumental in encouraging investment in the UK.

As it stands, those allowances will be scaled back to cover £200,000 worth of investment in a single year from April 2023, but the government has indicated that the figure could be increased to £500,000. Although that figure would be significantly lower than it has been in recent years, the potential would still be there for SMEs to derive considerable advantage as they invest their capital.

Writing down allowances (WDAs)

WDAs offer businesses the opportunity to deduct a percentage of the value of items they buy from their profits within a given timeframe. Typically, these allowances would be appealing to companies that aren’t able to benefit from the AIA because they are investing at too large a scale.

The government has said consideration is being given to increasing the percentages that can be deducted from profits from 18 per cent to 20 per cent for main assets, and from 6 per cent to 8 per cent for special rate assets.

Generally, while WDAs can help companies save significant sums of money, they can take a long period of time and anywhere up to a decade to make the most of. However, there are other rules specific to Short Life Assets (SLAs) that pertain to assets that need replacing within a few years, for example, computer equipment.

First year allowances

Another proposal put forward by the UK government concerns first year allowances and could see the rules changed so that companies can claim deductions worth 40 per cent on main assets and 13 per cent on special rate assets within the first year of the relevant investments being made. These plans could also combine with WDAs and allow for all remaining expenditure to be written down over time.

The goal of introducing the rules outlined above would fundamentally be to encourage investments among businesses by making those outlays less financially daunting. It isn’t yet 100 per cent clear what path the government will take concerning capital allowances in the coming years, but there are solid indications that they will be aiming to make the business tax regime more favourable to firms that are keen to invest.