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FB: Freeport tax sites – enhanced capital allowances

FB: Freeport tax sites – enhanced capital allowances

A 100 percent enhanced capital allowance for companies investing in plant and machinery in ‘Freeport tax sites’.

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Harinder Soor

Partner – Claims and Incentives

KPMG in the UK

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At Budget 2021 the Chancellor announced the introduction of eight English Freeports. However, we still eagerly await the confirmation of the designated ‘Freeport tax sites’. Within the designated tax sites a range of tax incentives will be available including a 100 percent enhanced capital allowance for companies investing in plant and machinery, a new 10 percent rate for the Structures and Building allowance (SBA) and stamp duty land tax (SDLT) relief. Draft legislation published in Finance Bill 2021 has shed more light on how these reliefs will operate. This article covers enhanced capital allowances while separate articles within this edition of Tax Matters Digest cover SBA and SDLT reliefs for Freeports.

Once the ‘Freeport tax sites’ are confirmed, companies may be able to claim a 100 percent enhanced capital allowance on expenditure incurred on the provision of plant and machinery, provided the following conditions are satisfied:

  • The plant and machinery is for use primarily in an area which, at the time the expenditure is incurred, is a freeport tax site;
  • The plant and machinery is unused and not second hand;
  • The expenditure is incurred for the purposes of a limited number of qualifying activities (specifically a ‘trade’ or mines, transport undertakings etc.);
  • Expenditure must be incurred on or before 30 September 2026; and
  • The company must be within the charge to UK corporation tax.

Although the draft legislation does not currently specify, referring only to plant and machinery, the assumption is that the 100 percent enhanced capital allowance applies to both main pool and special rate pool assets. The enhanced relief will be available for companies on capital expenditure incurred once the ‘Freeport tax site’ designation is provided, but before 30 September 2026. The Freeport enhanced capital allowance will be available for any spend (uncapped) within the ‘Freeport tax sites’ and so provides notable first year cash tax savings. For example, a company investing £10 million in a piece of machinery, would equate to an immediate cash tax saving of £1.9 million (assuming a corporation tax rate of 19 percent). This compares to a first-year cash tax saving of £342,000 under the current regime (assuming 18 percent per annum relief) and therefore provides an additional c£1.5 million in year one. As this is a First Year Allowance all general exclusions noted at s.46 CAA2001 will apply.

The recent introduction of the ‘Super Deduction’ and Freeports will provide companies, who are eligible for both schemes, the option of claiming the Super Deduction on main pool expenditure incurred before 31 March 2023 (obtaining relief at 130 percent) and the Freeport 100 percent enhanced capital allowance on special rate pool expenditure, as opposed to the 50 percent deduction the Super Deduction offers special rate pool assets.

It is important to note that the draft legislation contains some initial anti-avoidance measures relating to the exclusion of obtaining the 100 percent enhanced capital allowance where the plant or machinery is ‘partly’ or ‘primarily’ for use outside ‘Freeport tax sites’. It is also noted that the restriction on the qualifying activities will prevent property businesses from benefiting from the relief. Furthermore, the legislation provides for additional regulations to be published which will certainly provide additional guidance along with potential further restrictions.

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