Capital Allowances Investment Zones – What’s the Impact?
The recent ‘mini budget’ has dominated the headlines since its announcement on Friday, but this humble capital allowances specialist doesn’t propose to comment on the non-capital allowances changes announced! Thankfully, there several interesting (and slightly less controversial!) capital allowances announcements to talk about. This article takes an initial look at the potential of Investment Zones.
It’s not confirmed where these areas will be but a list of the “interested areas” for the Investment Zones can be found here.
There are many details yet to come, but the following worked example helps illustrate the benefit of capital investment within an Investment Zone.
The Imaginary Development
In this example consider a new distribution centre built after April 2023 (after the end of the Super Deduction), primarily of steel construction which includes warehouse space, sorting facilities, and a large yard for the movement of goods.
The distribution centre will cost £3m to build.
- £600k will be qualifying special rate expenditure incurred on the integral features in the property such as electrics, plumbing, lighting, and heating & ventilation
- Another £600k of the spend will be towards main pool plant & machinery such as CCTV & security, data installations, fire alarms and sprinklers, dock levellers, and roller shutter doors
- The remaining £1.8m relates to the structure of the building and yard area including the external fencing (the cost of the land is not included in the £3m)
To summarise, the £3m is split between the pools as follows:
- £600k of main pool plant & machinery expenditure
- £600k of special rate plant & machinery expenditure
- £1.8m of Structures & Buildings Allowances Expenditure (SBAs)
As with any capital allowances exercise, the exciting bit is what enhanced reliefs can be layered over the plant & machinery spend.
Tax savings: outside the Investment Zones
Assuming the group, individual or partnership has not used any Annual Investment Allowance (AIA) in other properties or spend for the year, up to £1m of plant & machinery spend can be claimed as a 100% first year allowance, equivalent to £190k of up-front tax saving (calculated at 19% CT rate, for non-company spend the relief could be much higher). In reality it’s likely a business of this size would have other plant & machinery expenditure at other sites or offices that it would wish to use its AIA against, reducing the amount of the £1m limit that may be applied to this property. Any plant & machinery expenditure not covered by AIA would attract the standard writing down allowances (WDAs). The deductions would arise over time on a reducing balance basis with an annual WDA of 18% and 6%, for main pool and special rate expenditure respectively.
The structural elements of the property would attract SBAs deductions at 3% per annum, taking a full 33 years before all the value of the structural spend is written off.
Tax savings: in the Investment Zones
Investment zones offer a 100% first year allowance for all plant & machinery. This is effectively an unlimited AIA on expenditure in the investment zone, freeing up that £1m AIA allowance for spend elsewhere. Here the full £1.2m would be deducted, equivalent to tax savings of £228k.
More significantly is the change to SBAs. Instead of being written off at 3% per year, over 33 years, the structural spend will be accelerated to 20% per year, over 5 years. In our example the £1.8m identified as qualifying for SBAs would translate to tax relief of £68.4k per year.
As good as all that?
While there are certainly upsides to investment zones there are definitely some aspects to consider.
Firstly, the current wording within the budget statement suggests that the enhanced plant & machinery allowances will only be available to companies. Additionally, this relief would only be beneficial to any business that would otherwise run out of Annual Investment Allowances in the year. Small businesses investing on plant & machinery well within the AIA limit of £1m, would gain nothing.
Secondly, the government statement makes no reference to the worst drawback of SBAs; the capital gains calculation. Currently, any deductions received from SBAs are added back to the base cost when the building is sold. This means that the relief obtained via SBAs is entirely clawed back on sale of the property. We expect this will be a pertinent point, when more details of Investment Zone reliefs are released. Regardless of the clawback, this enhanced rate of SBAs represents a significant timing benefit which could help with the commercial considerations of potential capital projects.
Look out for future articles on the changes as more details are released, and as ever, contact cal@yes.tax for any queries on all things capital allowances.
YesTax. Positively Better.