Super-deduction scheme; an overview
As part of the Government’s commitment to encourage business investment, the Chancellor announced during the budget a new, temporary first-year capital allowance for companies.
The 130% super-deduction for expenditure on new, qualifying plant and machinery will be introduced for two years from 1 April 2021. A first-year allowance of 50% will also be available for expenditure which usually falls into the special rate pool. Unlike existing relief, the new first year allowances are unlimited.
Taxable profits, and consequently Corporation Tax liabilities, will be lower as a result of these higher capital allowances claims. If a taxable loss is generated, this could be carried forward and offset against future taxable profits (potentially saving tax at 25% in future years) or carried back against prior year profits generating a Corporation Tax repayment.
It’s important to understand the interaction between these new temporary reliefs and existing reliefs in order to maximise the tax relief for your business, as it may not always be the case that new is better than old.
As business and tax advisers we are, understandably, being asked more questions about the super-deduction than any other area announced by the Chancellor and, as with all good tax legislation, the devil is in the detail.
24th June 2021
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Callum Anderson See profile -
Marketa Pasova See profile
Expenditure must be on new and unused plant and machinery, therefore expenditure on second-hand equipment will not qualify for the super-deduction.
Qualifying assets are the plant and machinery that would usually qualify in the main pool such as: plant, machinery, tooling, computer equipment, furniture, and commercial vehicles (vans/lorries).
Cars don’t qualify for the super-deduction as they’re specifically excluded. Similarly, assets purchased to then lease to customers also don’t qualify.
Plant and machinery expenditure which is incurred under a Hire Purchase or similar contract will qualify however assets under a Finance Lease will not.
Expenditure needs to be incurred on or after 1 April 2021 but before 1 April 2023. Expenditure is treated as incurred when an unconditional obligation to pay arises. However, the Chancellor did specify that any contracts entered into before 3 March 2021, regardless of when the unconditional obligation arises, will not qualify for the new relief.
The timing of expenditure is important and the rules complex so it’s important to get advice in order to maximise capital allowance claims.
Additional rules have been drafted on how proceeds are taxed from the disposal of assets on which the super-deduction has been claimed.
Typically, on the disposal of main pool assets, the proceeds received are simply deducted from the overall pool balance. As the pool balance is written down at 18% per annum, this effectively taxes the proceeds over several years, so long as there is a pool balance from which they can be deducted.
However, under the new regime, the proceeds are taxed when received and are therefore taxable upfront. This may therefore accelerate the tax charge on the sale of an asset, which is particularly an issue on high value slow depreciating assets and assets which are expected to be sold soon after purchasing, in which case 100% Annual Investment Allowance (AIA) could be a better choice in some circumstances.
Additionally, if the disposal takes place in an accounting period commencing before 1 April 2023, the proceeds are uplifted to claw back some of the tax relief provided by the super-deduction.
Further good news was announced during the Budget as the Chancellor confirmed the extension to the £1 million AIA limit, which allows a 100% deduction on qualifying plant and machinery, will continue until at least 31 December 2021.
Where assets qualify for both the new allowances and AIA, the company has the choice of which to apply.
Therefore, in practice, rather than claiming the new 50% deduction on special rate assets, the company will continue to claim AIA instead as this gives a 100% deduction.
It would only be beneficial to claim the 50% deduction in a case where the company had already spent £1 million on qualifying special rate assets.
In summary, the Government is trying to encourage companies to spend money to help rebuild the UK economy following the pandemic by offering an unprecedented temporary first year capital allowance to do so.
However, it’s important to understand the interaction between these temporary reliefs and existing reliefs, such as AIA, when considering your company’s investment strategy as it may not always be the case that the new reliefs are better than the old ones.
The type of asset acquired along with the timing of both the acquisition and any planned disposal will factor into which relief is best, or indeed available, so care should be taken before making any purchase decisions.
Of course, as always, if you have any questions about any of the above, please do get in touch with your Old Mill adviser in the first instance, or click here…