Facing growing concern about the economy, manufacturers are even more uncertain than usual about what the ‘Halloween Budget’ debt plan could bring and, in particular, how the capital allowances regime might change.
Although the current regime is widely criticised for being too complex and not sufficiently beneficial for manufacturers, there is no definitive information about the changes that could be on the way. Despite the uncertainty, there are some ways manufacturers can begin to prepare for whatever happens next.
Capital allowances are deductions applied to a company’s corporation tax liability, based on some or all the value of any assets they might have acquired. The qualifying assets typically include tangible items, such as machinery, equipment or vehicles. However, they can also include other expenditure that positively impacts a business, such as the costs of renovating or improving an office or manufacturing space or enhancing research and development activities.
The basis of the capital allowances regime has remained largely the same for some time, with occasional updates and short-term benefits made during Budget statements. However, there is a possibility that the new Government could introduce more fundamental changes to the regime this autumn.
Manufacturers will be particularly relieved that the new Government has cancelled the planned increase in corporation tax, which was due to take effect in April 2023. The 19% had been expected to increase to 25%, but it will now stick at 19% for the foreseeable future. At a time of rising inflation, manufacturers had been concerned that the increase would erode profits further and push some to the brink of insolvency.
To encourage business investment in a challenging climate, the Government introduced a ‘super deduction’ in April 2021, which allows manufacturers to claim 130 per cent tax relief on the value of any qualifying capital expenditure. In real terms this represents a saving of £24.75 for every £100 spent. The super deduction will end on 31 March 2023 however, as it was only ever intended as a short-term measure to aid businesses in their post-pandemic recovery. The scheme was lauded when it was first announced and manufacturers seemed hopeful that it would provide welcome support, however many businesses and their advisers have since criticised it for being overly complex, with too many limitations and caveats.
Despite the criticism directed at the scheme, manufacturers can still take advantage of the super deduction prior to it ending. With hybrid working more commonplace for example, some manufacturers are taking the opportunity to refurbish their premises. The cost of some of these renovations could qualify for capital allowances, potentially including the super deduction. Even if this capital expenditure is what the business had planned to spend anyway, the super deduction could help to bring forward spending decisions to enable efficiencies as well as benefitting from the additional tax relief.
With supply chain disruption causing longer waiting times for deliveries, manufacturers should also review their investment plans carefully, in order to make the most of the tax relief available. This could include taking deliveries of key pieces of plant or machinery before the 31st March 2023 deadline for the super deduction.
It is important for manufacturers to be agile during times of change. Being as prepared as possible and ready to adapt quickly when needed will help them to make the most of the capital allowances regime. Having meetings for decision makers pencilled in based on key dates could also enable fiscal changes to be addressed swiftly. This is particularly important for manufacturers with lengthy, multi-layered or complex processes for approving capital expenditure plans. For example, holding meetings just after the Halloween Budget should mean the business has a few months before the new tax year begins in April to finalise important decisions and prepare for any changes on the way.
While it is important for manufacturers to stay up to date with current legislation and announced changes, they should also consult a tax professional to provide guidance on what might happen in the future, relevant consultations, and how to prepare. They need to be aware of any nuances in current and future tax policies, so they can plan to capitalise on capital allowances.
While planning to invest is challenging in the current climate of economic uncertainty, it can still be done. Creating an investment roadmap that is based on clear financial aims, which are reviewed and refined when external policies are announced, is key to improving business resilience.
While the capital allowances regime could see more changes in the coming months, by preparing now manufacturers can be ready to make the most of them as and when they materialise.
