The Super Deduction Capital Allowance is over – what comes next?

On 31 March 2023, the Government discontinued the Super Deduction capital allowance rate, which allowed Limited companies to deduct 130% of the cost of investments in qualifying plant and machinery against their taxable profits, under which Omnicell pharmacy automation solutions qualified.

In its place a new “Full Expensing” 100% first year capital allowance was announced. This allowance is only available to incorporated companies, so sole traders and partnerships cannot take advantage.

How can the “Full Expensing” scheme benefit my pharmacy business?

First, you’ll need to know the level of Corporation Tax level at which your business will be liable to pay on profits. The new Corporation Tax rates introduced on 1 April 2023 will be applied at between 19% and 26.5% of profits, depending on the value of profit before tax.

• For companies with taxable profits below £50k, a rate of 19% will be payable
• For companies with a taxable profit above £50k but less than £250k, a rate of 26.5% will be payable on taxable profits
• For companies with a taxable profit above £250k a rate of 25% will be payable.

More information on the 2023 Corporation Tax rates can be found on the Government website here.

Under the Full Expensing scheme, if a limited company with a Corporation Tax rate at 25% and a taxable profit of £275k invested £100k on pharmacy automation, their taxable profits reduce by £100k, from £275 to £175k. This effectively reduces their tax bill by £25k (25% of the £100k investment). This equates to a tax saving of £250 for every £1000 invested.

How does it compare to the Super Deduction Tax scheme?

On the face of it, full Expensing is not as generous as the previous Super Deduction that allowed companies to deduct 130% of the cost of qualifying capital expenditure against taxable profit.

However, it must be remembered that prior to 31 March 2023, the corporation tax rate was 19%, meaning that a profitable company spending £100k on qualifying plant and machinery would receive an actual tax saving of £24.7k (£100k x 130% (super deduction) x 19% (tax rate), which is less than the tax saving which is now available under the full expensing regime (£25k).

More information at: https://www.gov.uk/government/publications/full-expensing/spring-budget-2023-full-expensingINFORMATION 

Can building costs associated with plant and equipment installation be claimed?

Yes, these costs can be claimed as long as they are specific to the installation of the plant machinery / equipment (including pharmacy automation equipment) and are not more general building costs.

What other tax incentives are available?

Annual Investment Allowance (AIA) – under the Capital Allowances scheme, the AIA allows you to deduct the full value of your capital outlay from your taxable profit, up to the value of £1 million. Whilst this looks very similar to full expensing, just with a cap on the amount of expenditure that can be claimed, the reality is that the AIA is a more flexible relief than full expensing. For example, the AIA can be claimed by unincorporated entities such as sole traders and partnerships, and it can also be claimed on a wider variety of expenditure, e.g., cars and assets which are purchased second hand. More info at https://www.gov.uk/capital-allowances/annual-investment-allowance

Writing Down Allowance (WDA) – again, under the Capital Allowances scheme, the Writing Down Allowance allows you to deduct the value of your capital outlay, but as a % of the value each year, rather than the full amount in one year. Again, Omnicell robotic automation solutions qualify as a ‘plant and machinery’ asset.

WDA’s will be of limited benefit moving forwards, and for the purposes of plant and machinery will only be relevant to unincorporated businesses who incur expenditure exceeding the AIA. Typically, the tax relief can be applied at 18% per year, although other rates are available depending on the nature of the expenditure.

More info at https://www.gov.uk/work-out-capital-allowances

James Fraser is a tax partner at Armstrong Watson, a firm of Chartered Accountants who provide a range of tailored services and financial advice, including accountancy, audit, tax, payroll, corporate finance, financial planning and corporate restructuring and insolvency. With 19 regional offices, Armstrong Watson is able to provide a bespoke, tailored service, whilst also having the expertise and depth of knowledge to work alongside any size of business.

PLEASE NOTE, THIS INFORMATION IS FOR INFORMATION PURPOSES ONLY. OMNICELL IS NOT AN AUTHORISED FINANCIAL ADVISER. ALWAYS CONSULT WITH A QUALIFIED FINANCIAL PRACTITIONER, SUCH AS YOUR COMPANY ACCOUNTANT, OR TAX ADVISOR BEFORE MAKING ANY DECISIONS REGARDING YOUR BUSINESS