To encourage capital investment in the first designated Freeports, the Chancellor has announced enhanced capital allowances for expenditure on plant and machinery and structures and buildings for use within Freeport ‘tax sites’.
The Freeport rules state that each Freeport must have a customs site but there is no formal obligation to create a tax site. Where a tax site is included within a Freeport, the enhanced capital allowances are only applicable to expenditure incurred within the designated tax site. The rules do give the Government the flexibility to differentiate areas within a Freeport.
Outside of the tax site area, expenditure will only qualify for the normal rates of capital allowances available. In practice, it is likely that the whole of a Freeport area will be designated as a tax site.
What are the enhanced capital allowances in Freeports?
The enhanced capital allowances available are:
- An unlimited 100% first year allowance for companies incurring expenditure on the provision of plant and machinery for use primarily within a Freeport tax site
- An enhanced structures and building allowance of 10% per annum (straight line basis) is available for expenditure incurred by businesses on constructing, renovating or acquiring new buildings or structures within a Freeport tax site
Both give companies or businesses investing in qualifying equipment or buildings a much higher tax deduction in the tax year of purchase or during the first years of use of the building or structure. They apply from the date an area is designated a Freeport tax site until 30 September 2026.
These allowances will be available alongside other capital allowances that are intended to encourage investment such as the temporary 130% super-deduction, 50% special rate allowance and the ongoing Annual Investment Allowance (AIA) which already gives 100% relief for costs of qualifying plant and machinery in the tax year of purchase.
What investments qualify for the enhanced plant and machinery allowances?
The 100% first year allowance for capital expenditure on plant and machinery is only available to companies subject to corporation tax and not individuals, partnerships or LLPs.
The expenditure must be incurred on plant and machinery for the purposes of a trading activity or for other specific activities, mainly in connection with mines, quarries, ironworks, gasworks, waterworks, and certain transport undertakings. The plant and machinery must be for use primarily within a Freeport tax site at the time the expenditure is incurred.
Although not all investments will qualify for the enhanced allowances, it applies to all plant and machinery. So it includes plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances and plant and machinery qualifying for the 6% special rate pool, including integral features in a building and long life assets. If the plant and machinery will be partly used outside a tax site then a just and reasonable apportionment will be required and, as usual, second hand equipment will not qualify.
As the enhanced allowance is a first year allowance, the normal exclusions apply so certain assets will not qualify For example, cars and plant and machinery that is acquired for leasing. The normal capital allowances disposal rules apply which can include balancing charges.
What investments qualify for the enhanced structures and building allowances?
Unlike the enhanced capital allowance on plant and machinery, the enhanced structures and building allowances is available to all businesses acquiring, constructing or renovating non-residential buildings or structures. So it applies to both income tax and corporation tax payers and is available for all qualifying activities including trades and also property businesses.
The enhanced structures and building allowance provides a 10% allowance on straight-line basis rather than the normal 3% per annum. For tax purposes the cost of a qualifying building or structure can be written off over a period of 10 years rather than the normal 33.3 years.
This allowance also applies from the date an area is designated a Freeport tax site until 30 September 2026 – so you should not enter into a construction contract or allow construction to commence until the site has been designated a Freeport tax site. The building or structure must also be brought into non-residential qualifying use before 30 September 2026.
A structures and building allowance statement will also be required and it will be necessary to confirm on the statement that the enhanced allowance is to apply. The normal clawback and anti-avoidance rules will apply.
There is little doubt that the enhanced capital allowances available will encourage a surge of investment in Freeport areas. However, whether full business relocations to the new zones will be allowed under the forthcoming UK State Subsidy rules remains to be seen.
As always, there are many qualifying conditions for businesses to consider and, with the main rate of corporation tax going up to 25% from 2023, deciding on the most tax-efficient mix of capital allowance claims may be complex. Such considerations are likely to require careful forecasting of future profits, losses and capital investments to ensure that your business makes the right decisions.
For help and advice on all capital allowance claims in relation to Freeports, please get in touch with your usual BDO contact or Steve Watts.
Visit our Freeports hub for more information