Post Covid-19: UK Corporation Tax Booster Jabs

published on 5 August 2020 | reading time approx. 4 minutes

Given that businesses will be trying to maximise efficiency wherever feasible post the crisis, let us focus on some areas that can aid decision making and offer some tax incentives.

• CAPITAL ALLOWANCES ON LARGE CAPITAL PROJECTS »

• COMPANY CARS »

Recovery and indeed survival of UK firms will require UK firms to use every avenue within their power to maximise efficiency and save costs. In this regard, any tax savings will be warmly received. Whilst a lot of media attention is often on elaborate and complex tax arrangements, it is easy to overlook simple reliefs and allowances that are available to UK firms with timely planning and implementation.
 

This article will touch on a couple of areas which can aid decision making and offer some well needed tax boost to UK firms.

Capital Allowances on Large Capital Projects

Analysis of the capital allowances treatment of large capital projects can be complicated with individual additions needing to be analysed and treated correctly in order to maximise the tax relief.
 

Capital allowances: UK system

In the UK, for tax purposes accounting depreciation is disallowable, instead the UK operates a system called capital allowances to give tax relief for qualifying assets.
 

Capital allowances: General overview

Broadly, in the year of addition each asset is either treated as follows:

• Ineligible for capital allowances (i.e. no tax relief). An example is expenditure on acquiring land.
• Added to the general pool (obtaining tax relief at 18 per cent per annum against profits chargeable to corporation tax, on a reducing balance basis). Examples of such items include:
  1. Plant and machinery
  2. Furniture
  3. IT equipment

• Added to the special rate pool (obtaining tax relief at 6 per cent per annum against profits chargeable to corporation tax, this has reduced from 8 per cent since 1 April 2019). Integral features would be added to the special rate pool, examples include:
  1. Lifts, escalators and moving walkways
  2. Water heating systems
  3. Air-conditioning and air cooling systems
  4. Hot and cold water systems
  5. Electrical systems, including lighting systems

• Additionally, and probably the most important element to consider is, there is also an Annual Investment Allowance (AIA) which is set by UK Tax Authority (HMRC) based on calendar years. A few important points to note regarding AIAs are:
   
  1. The AIA is applicable to qualifying items (general pool asset additions and special rate pool additions). Qualifying additions up to the AIA limit will qualify for 100 per cent tax relief in the year of addition (rather than over a number of periods via the pools).
   
  2. The AIA limit has increased from £200k to £1m for a temporary two year period from 1 January 2019 to 31 December 2020. As it stands the AIA is expected to revert back to £200k per annum from 1 January 2021, therefore if capital expenditure projects are planned in the near future the aim should be to complete these before 1 January 2021.  
• There is also a new non-residential structures and buildings regime, whereby such expenditure will be eligible for a 2 per cent/3 per cent straight line basis allowance (3 per cent from 1 April 2020), where all new contracts for the physical construction work are entered into on or after 29 October 2018.
• Expenditure on items which are deemed to be revenue in nature and have been capitalised, e.g. painting and decorating costs, will only get tax relief once taken to the profit and loss accounts via deprecation. It would therefore be advisable that this type of expenditure is actually expensed and not capitalised, as it will then obtain tax relief in the year expensed.

In additional to the above general guidance, it is useful to get tax advise throughout the course of a capital project to ensure that capital allowances claims are maximised and the proper records are kept. 

Company cars 

The automotive world has seen significant advancements in technology and efficiency in recent years. This area has been of particular focus for the UK government as they attempt to reduce carbon emissions and encourage greater use of low emission vehicles. This has been reflected in changes to tax legislation which provide tax incentives to companies who use low emission vehicles in their businesses.
 

Recent changes announced in the latest UK Budget demonstrate that tax reliefs are now mainly aimed at fully electric cars or cars with CO2 emissions of 50 g/km and below. UK firms planning on purchasing or leasing cars in the future should bear in mind the thresholds laid out below carefully.
 

Definition of a car

The definition of a ‘car’ for capital allowances purposes is a mechanically propelled vehicle except:

1. A motorcycle, or
2. A vehicle constructed in such a way that it is primarily suited for transporting goods of any sort, or
3. A vehicle of a type which is not commonly used as a private vehicle and is not suitable for use as a private vehicle

Lorries, vans, trucks, etc. are therefore not ‘cars’ for capital allowances and are treated in the same way as ‘standard’ pieces of plant and machinery.  

Capital allowances on purchases of cars

Cars do not qualify for the annual investment allowance (AIA). The current capital allowance rates applicable to purchases of cars are as follows:

Leasing of cars

In recent years, there has been a 15 per cent lease rental restriction for the costs of hiring business cars for more than 45 consecutive days, where the emission are over 110 g/km. A new 50g/km threshold will apply from 1 April 2021 for this purpose.