Capital allowance full expensing: Not always the best choice for a charitable owned trading subsidiary

The super deduction gave 130% up-front deduction for most capital expenditure qualifying for the main pool (50% for the special rate pool) incurred between April 2021 and March 2023, the Annual Investment allowance gives £1m of up-front deduction for most capital expenditure qualifying for allowances, and from April 2023 full expensing also provides up-front relief. For most trading companies claiming up-front tax relief will almost always be beneficial, but frequently this will not be the case for a company set up to generate funds for a charity.

The reason why a charitable-owned company will frequently not benefit from making the maximum possible capital allowance claim is that the company exists to generate funds for the charity, and that it therefore donates as much of its profits as possible to charity.  A company which makes the maximum possible capital allowance claim in the year of significant expenditure (such as its initial shop-fit-out or a 10-year refurbishment) may find that it has the choice between either delaying donations (which could cause cash-flow issues for the charity that it supports) or losing the tax-benefit of its donations in the year of the works, possibly causing an unexpected tax charge in later years.

As a somewhat overly simple example for £500,000 of capital expenditure to be written off over 5 years, by a company which donates all its accounting profit to its parent charity annually:

* The gift aid tax saving in Year 1 is reduced to zero because the company has taxable losses, and non-trade charges such as donations to charities cannot be carried forward.

As can be seen the capital allowance claim in year 1 causes a tax loss of £300,000, this loss is carried forward and can be offset to cover the year 2-4 profits, but the loss is not enough to cover the year 5 profits.  The problem arises because unlike trading losses, tax relief for donations cannot be carried forward to later periods.  A company that is wholly owned by one or more charities can relate a donation back to the previous tax year if the donation is made within 9 months of the end of the accounting period but this option is unlikely to be of much help in this scenario without significant forethought.

An advisor making a capital allowance claim for year one needs to think about whether or not they should restrict the claim, despite the fact that there is no tax benefit from doing so until year 5.  Indeed as taxable profit is often higher than accounting profit due to minor disallowable items, depreciation on capital assets not qualifying for capital allowances, etc, in a less simplistic scenario the advisor may need to consider a trade-off between making a full claim in year one so they have losses to cover minor tax bills in years 2-4, or restricting the claim in year 1 and then suffering modest tax charges in years 2-4 in order to obtain the optimal tax bill in year 5.

The problem can be avoided if the company had the habit of making its donations after the year end and then relating them back as required for tax purposes, however that may not be practicable where the charity requires donations during the year, or where the company has covenanted to transfer its annual profits to the charity.

In terms of the capital allowance claim it is worth considering the use of short life asset elections in order to improve the timing of relief claims on assets where full up-front relief via the AIA or full expensing is not claimed as assets in the general pool receive only 18% writing down allowances annually and special rate pool assets a derisory 6%.