When do I carry out my proposed Capital Expenditure Project?
You may have plans to extend or refurbish your care home, but when is the right time to carry out these works?
Of course, you must consider demand, no one wants empty rooms, but have you also considered the tax implications of the timing of your project. Probably not, but should you?
The Budget on 3 March 2021 announced two new temporary first year allowances available to companies subject to corporation tax, referred to as the ‘super deduction’ and the ‘special rate allowance’, both of which apply for capital investment in qualifying equipment/assets made between 1 April 2021 and 31 March 2023, provided that the contract for the plant and machinery was entered into after 3 March 2021.
These new first year allowances are available in addition to and alongside the Annual Investment Allowance (AIA), which is currently set at £1m until 31st March 2023, when it is scheduled to reduce to £200,000, and which provides for 100% relief for the cost of qualifying plant and machinery up to £1m in any one tax year, provided the relief is claimed in the tax year in which the expenditure is incurred. This allowance is available to corporates, some partnerships and individuals.
The super deduction provides for relief at 130% of the qualifying cost of main pool plant and machinery assets and the special rate allowance gives relief at 50% of the qualifying cost of special rate pool integral features in the first year.
Without the new first year allowances or the AIA the rate of writing down allowance is 18% per annum in respect of the main pool and 6% per annum in respect of the special rate pool, both written down on a reducing balance basis.
So, for example let us say you are planning a 10 bed extension plus some other alterations for which the capital cost is £1,260,000, including non-recoverable VAT. The qualifying expenditure for capital allowances on such a project may be in the region of £550,000, of which £240,000 is for main pool fixtures and £310,000 is for special rate pool integral features.
Scenario 1 – Contract for the project in 2022 and complete prior to 31st March 2023 and the first year tax saving is £118,000.
Scenario 2 – Contract for the project post April 2023 and the first year tax saving is £62,500.
As is the case with all capital allowances, if a business does not have sufficient profits against which to offset their full entitlement to capital allowances, then a loss will be created which can be carried forward and utilised against future taxable profits.
Whilst tax must not be the driving force behind a decision to carry out a capex project as it must always be for
good sound business reasons, if you are going to embark on a capex project anyway then it is worth considering
the timing of it to maximise the tax saving incentives currently available.
To find out more and to contact Jex Capital Allowances, follow this link.