Corporation tax increases
We have now had confirmation that the main corporation tax rate will go up from 19% to 25% from the start of April. One effect of this is that if a company can claim capital allowances of £100,000, the potential tax saving will increase from £19,000 to £25,000.
This change will not apply for trading companies with annual profits of up to £50,000. For trading companies with profits between £50,000 and £250,000, however, a marginal tax rate of 26.5% will apply, increasing still further the potential tax saving.
This can be illustrated as follows:
First £50,000 of profits taxed at 19% = £9,500
Next £200,000 of profits taxed at 26.5% = £53,000
The total of £62,500 is the same as taxing the full profits of £250,000 at the new standard rate of 25%.
For example, if a company has profits of £200,000 and can claim allowances in the year of £100,000, those allowances will save it tax of £26,500 (£100,000 at 26.5%). It has been a long time since the potential value of allowances was so high.
Annual investment allowances
We have also now had confirmation that the annual investment allowance (AIA) will stay at its current level of £1 million “permanently” (to the extent that anything in the tax world is permanent). The figure of £1 million has until now been only a temporary one, and was expected to reduce next year. Maintaining the AIA threshold at this higher level removes some very complex transitional rules. More importantly, it means that many businesses can claim full and immediate tax relief for all of their qualifying expenditure on most plant and machinery. Cars are excluded, but fixtures in buildings – even integral features – can benefit from this higher level of AIAs.
Super-deduction
The super-deduction for certain expenditure on plant and machinery was really just a mechanism to ensure that companies did not postpone their investments to after April 2023, so as to enjoy the higher tax relief referred to above.
The super-deduction will therefore be brought to an end from April as originally planned.
Are capital allowances legitimate tax planning?
Unless there are any more surprises, we now know what tax rates will look like for 2023-24. We also know that we will have a general election in the next two years or so, and it is possible that some pre-election rabbits will be pulled out of the hat for the 2024-25 tax year. But it seems very likely that taxes will remain high for many years to come.
For businesses struggling to survive and grow, legitimate tax planning is not just desirable but essential and sometimes even existential.
Against this background, it is worth remembering that capital allowances have been repeatedly given the official stamp of approval – by HMRC, in Parliament and elsewhere – so they are very clearly in the category of legitimate tax planning. The claiming of capital allowances is not in any sense an inappropriate tax avoidance measure.
There is one key proviso to this statement, however, which is that claims must be properly formulated, and this requires an in-depth understanding of the relevant tax law. In particular, a claim will not stand up to official scrutiny if the meaning of plant and machinery is not properly understood, taking full account of statutory provisions as well as of more than a century of case law. In the context of fixtures claims, the sometimes complex statutory provisions must be fully considered, with full adherence to time limits, to the so-called pooling requirement and to the correct use of elections.
As long as claims are properly formulated, capital allowances can offer the certainty of valuable tax savings.
