New Capital Allowances Regime for 2024

There have been some major changes to capital allowances claims (i.e. asset depreciation rates permitted for tax purposes). Which came into effect on 1 April 2023. Further significant changes were proposed from 1 April 2023. I thought it would be useful to summarise these and draw your attention to some important tax planning points.

Writing Down Capital Allowances

What is the capital allowance rate? This has been reduced from 20% to 18% with effect from April 2023.  From April 2008 the rate of writing down allowances for long-life assets was increased from 6% to 10% for the current financial year of 2024/2025 it is the same.

The new category of the plant has been introduced, being integral fixtures that now qualify for writing down allowance at 6% p.a.

All writing down allowance rates apply to the reducing balance each year although once the value of all items considered together becomes £1,000 or less the whole amount can be claimed in full.

Annual Investment Allowance (AIA)

Relief is now given at 100% on an annual investment allowance of £100,000 p.a. of capital expenditure (basically, the first-year allowance of 100% currently limited at £100,000) and is available to businesses of all sizes on plant, machinery, and fixtures, excluding motor cars and long-life assets.

The monetary ceiling is divided up between businesses/partnerships under common control and companies in the same group, or companies under common control carrying out similar activities or at the same location.

The annual limit is reduced proportionately for accounting periods of less than twelve months and is time apportion between accounting periods in which a different ceiling limit applies.

Integral fixtures that do not fall within the £100,000 annual investment allowance vans limit only qualify for a 8% writing down allowance via a new reduced rate pool.

The expenditures involved include lifts, escalators, heating, cold water systems, air conditioning systems, wiring, and certain other items of plant and machinery that become part of the building into which they fit.

Plant and machinery not being integral fixtures and more than the £100,000 limit falls into the general pool and qualifies for the 18% writing down allowance from the year of acquisition onwards.

Enhanced Capital Allowances on Energy Saving and Environmentally Beneficial Plant

The rate continues at 100% (and does not count towards the use of the AIA ceiling limit). Still, loss-making companies can now surrender their allowances for repayable tax credits, similar to research and development tax credits already available.  (Note that that facility does not apply to low-emission cars and in any event, only applies to companies and not individuals or partnerships.)

Motor Vehicles

From April 2023 the expensive car rules (in which capital allowance rates are restricted to £3,000 p.a. but on disposal, a balancing allowance is granted to the extent of all previously unrelieved expenditure) were replaced and on additions from April 2023 allowances are available based on the car’s CO2 emissions as set out below:

1. 100% First Year Allowances will continue for cars with emissions up to 110g/km and for new zero-emission commercial vehicles.
2. Commercial vehicles (other than the ones that are new and have zero emissions) are handled as plant and machinery and can qualify for the AIA (subject to the annual ceiling limit which has to apply on all plant, machinery, fixtures, integral fixtures, and commercial vehicles in aggregate) and to the extent not relieve via the AIA are entitled to the 18% writing down allowance.
3. Cars with emissions between 111g/km to 160g/km are to be included within the general plant and machinery pool and qualify for the 18% annual writing-down allowance.  Such cars will not qualify for the Annual Investment Allowance.
4. A new pool with a lower writing down allowance 6% from April 2023 has been introduced for cars with emissions exceeding 160g/km.  Such cars will not qualify for the Annual Investment Allowance.

Motor Vehicle Allowance

As all cars are to be pooled, there is unlikely to be balancing allowances available for companies on disposal as the pool will continue for the life of the trade.  Individuals and partnerships with vehicles that include a private use adjustment should continue to qualify for a balancing allowance as and when disposal takes place at less than the written-down value for tax purposes.

For leased vehicles and hire cars for 45 days or more acquired from April 2023 onwards a 15% disallowance of lease/hire costs incurred will apply to cars with emissions of 160g/km and above.

Another point to consider is the definition of a van, especially in the context of double cabs and other hybrids. This is complex and depends on the make and model of the specific vehicle but broadly is a vehicle of less than 3500 kg of construction designed primarily for the conveyance of goods or burdens (rather than people).

Note that it is the purpose for which the vehicle’s design is important (actual usage is irrelevant).

Also note that HMRC generally accepts double-cab pickups with a payload of one tonne or more as vans and the Land Rover Defender 110 with blank out windows behind the second row of seats also classifies as a van (note that the category under which a vehicle is registered for road tax is likely to be accepted as evidence of its status, i.e. categories TC48, 49, 59 are cars whereas categories TC36 and 39 are light goods vehicles).

Transitional Periods

Where an accounting period straddles 1 April 2023 the writing down allowance will be calculated by time apportioning the old and the new rates.

Similarly, where an accounting period straddles a date on which the annual investment allowance changes a time apportionment of the old and new ceiling limit will apply.  Furthermore, the allowance available for qualifying expenditure post 1/6 April 2023 has a limit to a maximum by reference to the new lower annual £25,000 figure.

In practice, this means that to maximize the allowance on all but the smallest items expenditure needs to be incurred on or before 31 March 2023.

If a short-life asset election takes place, the separate pool will continue with the hybrid rate as above and apply in the transitional period and the 18% rate available thereafter.  Short-life asset elections cannot be assembled for integral fixtures or motor cars.

Expensive cars (i.e. those costing more than £12,000!) owned at the April 2023 transitional date will continue to qualify for a 18% writing down allowance subject to a maximum of £3,000 p.a. and a balancing allowance on disposal but after five years, i.e. in April 2023, any vehicles subject to the transitional rules at that point will be merged into the new system.

Planning Points

• Certain items, particularly cold water supplies and electrical wiring which under the previous regime did not qualify for plant and machinery allowances, now qualify (albeit for only a 6% from April 2023 writing down allowance unless the items in question qualify for the annual investment allowance) and relevant expenditure will need to be identified.
• Possible new motor car purchases, leases, or hiring for more than 45 days should be of a type producing emissions of 160g/km or less.
• Consideration to give short life asset elections to qualifying expenditure over the £100,000 (£25,000 from April 2023) Annual Investment Allowance especially as the Finance Act 2011 is to extend the short life election period to eight years (from four) in respect of expenditure incurred .
• Manufacturers and distributors of the energy-saving plant on which a 100% first-year allowance is available usually issue some sort of certificate of compliance which needs to be dealt with when producing tax computations.
• As the annual investment allowance is scheduled to be reduced in April 2023 (from £100,000 p.a. to £25,000) plant and machinery additions in the accounting period ending after 31 March 2023 should incur on or before 31 March 2024 to avoid the significant restriction which applies to the Annual Investment Allowance thereafter.
• Disposals of expensive vehicles acquired before April 2023 which take place before April 2023 should generate an immediate balancing allowance on disposal rather than being merged into the new system in April 2023 if still belongs to someone at that date and only generates writing down allowance over a considerable number of years.

The new regime favors smaller businesses in terms of rate allowance due (100% up to the £100,000 p.a. limit) and simplicity.  For larger projects capital investment advice should be sought to ensure the availability of allowances is maximized.

 

Disclaimer: All the information provided in this article on New Capital Allowances Regime, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.