Professional Firms Insight: how professional firms are affected by the capital allowances super-deduction

9 June 2021 / Insight posted in Article

The Chancellor of the Exchequer announced in this year’s Budget the introduction of a capital allowances super-deduction.

Between 1 April 2021 and 31 March 2023, companies will be eligible for an upfront 130% tax deduction for qualifying expenditure on plant and machinery. During the same period, companies that incur qualifying expenditure on assets that would ordinarily be eligible for capital allowances at the lower rate of 6% (such as integral features within a building) will be able to claim an upfront 50% tax deduction.

These enhanced deductions are very specifically targeted at companies, so professional firms operating through pure partnership/LLP structures will simply not be eligible. Professional firms that either operate through companies or that have companies within their group structure will of course be looking to take full advantage of this policy.

As would be expected, there are several conditions that need to be met for these enhanced deductions to be available. It is particularly worth noting that they can only be available on assets that are to be leased, where those assets are ‘background plant and machinery’ in a leased property (essentially assets that are intended to make the building useable, such as heating and hot water installations, lifts etc.).

Some professional firms have property-holding subsidiaries that lease the office to the main operating entity. Those subsidiaries may currently be incurring or planning significant expenditure on their properties as they adjust to professional life after the pandemic. If so, they may be able to claim the new enhanced deductions regarding any assets that qualify as ‘background plant and machinery’. However, expenditure on other assets that are to be leased to the main operating entity (such as furniture and IT equipment) is unlikely to qualify.

Where the enhanced deductions are not available – for example, because the expenditure is incurred in a partnership or LLP, or in a company but is excluded from qualifying – firms will be looking to take full advantage of the annual investment allowance, which gives a 100% tax deduction on qualifying costs. The annual investment allowance is currently set at £1,000,000 but is due to fall to £200,000 on 1 January 2022. Firms looking to take advantage of this may need to carefully consider the timing of their expenditure.

If you would like to discuss what the rules mean for capital expenditure that you are currently incurring or planning, please contact a member of the team.