Incentives for investment in R&D & capital

Advisers and taxpayers alike may have been expecting a big announcement from the Chancellor with respect to driving investment in the UK economy. The Chancellor did not disappoint but interestingly, the “big bang” measure related to enhanced relief for capital expenditure and not for an increase in R&D tax incentives as many had hoped. 

Capital expenditure reliefs

Super deduction for plant and machinery

The vanguard announcement, which is unique historically, is the introduction of an enhanced superdeduction equal to 130% for expenditure on certain items of plant or machinery. 

This super-deduction will apply to capital expenditure on “main pool” plant and machinery incurred by companies between 1 April 2021 and 31 March 2023. 

Therefore, if a company spends £1,000 on qualifying items of plant and machinery within the dedicated time period, it will be able to deduct £1,300 from taxable profits. At present, the company may be able to claim the full amount as a deduction using the Annual Investment Allowance, so in effect, the company receives additional benefit of 30% of expenditure (equivalent to a cash tax benefit of 5.7% of the original expenditure). The benefit is greater for those companies that have already used their Annual Investment Allowance as the applicable writing down allowance for these items is 18% per annum on a reducing balance basis. 

There are significant points to note: 

  • It is only available to companies within the charge to corporation tax. 
  • It is not available for items with a long life (over 25 years), integral features within a building, or solar panels (i.e. special rate pool items). 
  • It is not available for cars. 
  • The items must be new and unused. 
  • The items should not be used in a leasing trade. 
  • If the item is subsequently disposed of, the full disposal proceeds may be brought into account as taxable income. 

First year allowance for special rate items

Whilst special rate pool items are excluded from the super-deduction, a temporary first-year allowance of 50% will be introduced for expenditure on these items. This provides a welcomed increase over the existing 6% reducing balance rate and will apply for the same period (up to 31 March 2023). 

The following restrictions apply: 

  • Is only available to companies within the charge to corporation tax. 
  • It is not available for cars. 
  • The items must be new and unused. 
  • The items should not be used in a leasing trade. 

Annual Investment Allowance

The temporary increase to the Annual Investment Allowance has also been extended to £1m for expenditure incurred up to 31 December 2021. 

R&D tax credits

Unfortunately, no widescale improvements to the R&D tax incentives regimes were announced but there may be further measures announced later in 2021: 

  1. The cap on the cash credit claimable by companies within the SME R&D tax credit regime (as previously announced) will come into effect from 1 April 2021. This cap will broadly limit the amount of cash credit that may be claimed to three times the employment taxes liability of a company plus £20,000. Certain conditions and exemptions will apply. 
  2. The Government published responses to the consultation on qualifying expenditure for R&D purposes. No decisions have yet been made but further changes are expected to potentially bring in data costs and cloud computing costs as being qualifying expenditure. Other categories of previously qualifying expenditure may be restricted as a quid pro quo. 
  3. A wider consultation has been published dealing with the effectiveness of the R&D tax regimes. This has focussed primarily on easing the administrative burdens of the regimes and improving engagement with HMRC but also includes questions relating to the possible merging of the two schemes. A consultation to respond to and keep an eye on! 

Capital expenditure in Freeport regions

Eight new Freeport destinations in England have been announced. These areas allow for goods to be imported to GB without customs duties being applied and include the East Midlands Airport region, Liverpool City region, Thames region and Teesside region. 

The Structural Buildings Allowance for expenditure on buildings or structures within these regions will be increased to 10% (currently 3% per annum) and Enhanced Capital Allowances of 100% will be available for expenditure on plant and machinery within these regions. 

There are also additional stamp duty land tax reliefs for these areas. 

The devolved administrations of Wales, Scotland and Northern Ireland are also expected to announce their own policies for freeports within these regions.

Get in touch

If you have any queries on the topics covered above, please contact Mathew Scott, partner, KPMG in Belfast.