Add in the tax initiatives introduced by the Chancellor, Rishi Sunak, at the Budget on 3 March 2021 and investing in the United Kingdom becomes interesting.
A 130% ‘super deduction’ has been introduced for capital investments in qualifying new plant and machinery for two years commencing on 1 April 2021. A first-year allowance of 50% has also been made available for expenditure which ordinarily qualifies for special rate relief.
What does these mean?
When a company in the United Kingdom spends money on capital assets, not all expenditure will qualify, but where it does, companies obtain what is called “capital allowances”. Capital allowances permit a company to write off the costs of these qualifying assets against taxable income. This deduction is permitted as a taxable deduction and so helps reduce the taxable profit a company makes and the tax it must pay.
For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments. This means, for example, for every £1000 invested, a company receives £1300 as a deduction against its taxable profits. This calculates out as for every pound a company invests, their taxes are cut by almost 25p. This has been called the Super Deduction. The super-deduction will provide companies with a deduction that exceeds the actual cost paid of the qualifying asset.
This new relief is only available to incorporated companies, and only for new plant and machinery, not second-hand equipment. It is not available to sole traders, partnerships and LLPs. It is also only available provided the company has not entered into the contract to purchase the asset before 31 March 2021.
Where capital expenditure doesn’t qualify for the plant and machinery main pool but falls into the ‘special rate pool’ which attracts an annual capital allowance deduction of 6% will now temporarily benefit from a first-year allowance of 50%.
This is very good news and demonstrates the UK Government’s commitment to encouraging investment. Foreign companies or foreign investors looking to invest in the United Kingdom can effectively now set up a UK limited company, spend on capital expenditure and after taking the tax benefit of the super deduction into account, find that the real net cost to the company of that capital investment is just 75%.
The bad news is that the UK Chancellor also announced at the Budget that the current corporation tax rate of 19% will rise to 25% with effect from 1 April 2023. The 19% rate will continue to apply to companies with profits of not more than £50,000, with marginal relief for profits of up to £250,000. However, even with 25%, this still remains the lowest rate in the G7.
With the economy growing fast and the possibility of two years of strong economic performance, with a very favourable tax regime to support capital investment, has there ever been a better time to consider investing in the United Kingdom.
