Capital allowances are a governed system of UK tax reliefs that provide savings through a reduction of business profits chargeable to tax. They essentially reduce business corporation and income tax payments. The tax relief is available to all UK taxpayers (including offshore and inward investors) who incur capital expenditure on assets when investing in property. The tax relief applies to assets such as services, embellishments, flexible equipment, etc.
Relevant and qualifying building projects include new builds, extensions, refurbishments, fit-outs and specific upgrades, and can apply to all property sectors including offices, retail, leisure, hotel, industrial, etc (excluding residential with some exceptions, e.g. blocks of apartments common parts).
Capital allowances offer a unique form of value engineering – If projects utilise capital allowances savings to realise an additional 5, 10 or 15% of value, scheme opportunities are substantially increased. Capital allowances remain of value if a project has begun or is even complete, entitlement will not generally diminish. Proactive planning, however, will exploit all optimal project opportunities and maximise savings.
More recently the UKs economic recovery was placed at the heart of the Budget, unlocking significant cash reserves through increased capital allowances, and with an expected investment into the property sector of £20-30 billion over the next few years, there is a great deal of value for clients. Companies will be able to claim these quite remarkable levels of capital allowances in the form of 130% ‘Super Deductions’ for General Plant, along with new ‘First Year Allowances’ which will be available for all Integral Feature assets at 50% in the first year. This essentially means clients can realise savings over and above full cost deductions rather than just accelerating the mitigation of a tax liability. Furthermore, the extended Annual Investment Allowances (AIA) tax relief of £1m per annum currently remains in place.
This should encourage companies to view future or new projects more immediately, stimulating clients to bring projects forward and no doubt providing a great catalyst to increase construction expenditure. Certainly, both increased cashflow and permanent savings will aid business confidence which is very much needed.
Here is a quick worked example
When a building project qualifies for capital allowances substantial tax savings are available to the UK tax paying business when the expenditure is incurred on the property. As a guide, potential plant, and machinery capital allowances available on say an office refurbishment, could provide typical qualifying percentages of between 60-80% of total spend, including professional fees. If, for example, capital expenditure of £5m were incurred on a project this could provide capital allowances of up to £3-4m, and applying a company tax rate of 19%, may realise immediate cash savings of approximately £800,000 on the development, subject to tax liability, with further savings in subsequent years. Previously, these still incredibly significant savings would have been realised more slowly over many years but are now available in real project timeframes.
There has never been a better time for clients to engage with capital allowances.