The ‘headline’ announcement in the Chancellor’s 2021 Budget was the ‘Super-Deduction’ for investment in plant and machinery. This applies for qualifying expenditure on plant and machinery (P&M) incurred from 1 April 2021 to 31 March 2023.
The super-deduction provides allowances of 130% on new P&M investment that would ordinarily qualify for 18% writing down allowances (WDAs) in the main capital allowances pool. This is a tax saving of £247 per £1000 of expenditure, with no upper cap on the claim.
Example: A company has taxable profits of £950,000 and incurred £300,000 of capital expenditure during the year which qualifies for the super-deduction. The capital expenditure results in the company receiving a deduction for £390,000 (130% of £300,000), and this reduces taxable profits to £560,000. Corporation tax at 19% is £106,400. The capital expenditure saved £74,100 of corporation tax
This additional deduction is available to businesses chargeable to corporation tax only, therefore sole traders, partnerships and LLPs are unable to claim.
Qualifying Expenditure
The 130% is applicable to P&M that ordinarily qualifies for capital allowances, i.e., plant, machinery, fixtures, and equipment used in the trade.
It is important to note that the P&M must be new and unused, therefore second-hand assets will not qualify for the super-deduction.
Expenditure is “incurred” for this purpose as soon as there is an unconditional obligation to pay for it. This is usually the date of delivery; however it can be sooner. If the contract for P&M expenditure was entered into before 3 March 2021 then the super-deduction is not available.
Note that there is also a first-year allowance (FYA) of 50% on new P&M investment that would qualify for 6% WDAs in the special rate pool. This includes integral features within a building such as electrical systems, cold water systems, water heating systems, lifts and escalators.
Exclusions
The following assets are excluded from the super-deduction:
- Second hand or previously used assets
- Cars (including low/zero emissions)
- Assets acquired when the business is in its final year of trade
- Long life expenditure (useful economic life of more than 25 years)
- Assets which are leased out
Expenditure incurred under a hire purchase or similar contract must meet additional conditions to qualify for the extra relief. Essentially the HP contract must provide that the ownership will pass to the hirer on the exercise of an option or other event. The accounting treatment must also capitalise the asset in the accounts, and it must actually be in use at the end of the relevant accounting period.
Finance leases which are not hire purchase contracts will not be eligible for the deduction.
Disposals
On the future disposal of an asset, which initially received the super-deduction, a balancing charge will arise. The sale proceeds used to calculate this charge will be ‘enhanced’ by 130% or 50%, depending on the initial treatment (as explained above).
The main rate of corporation tax is set to increase to 25% from 1 April 2023, therefore it is worth noting the enhanced balancing charge is likely to be subject to higher rates of tax in the future.
Annual Investment Allowance (AIA)
The AIA limit will remain at £1m until 31 December 2021, and then reduce to £200,000 after this date. Transitional rules apply when the accounting period straddles 31 December 2021.
A business has a choice as to whether to claim the AIA or the super-deduction. Whilst the AIA provides an allowance of 100% against P&M expenditure, resulting in a tax saving of £190 per £1,000 of expenditure, the enhanced balancing charges will not apply on a future disposal.
Care should taken to claim the most beneficial relief for the business.
Anti-avoidance
Various provisions exist to deny the super deduction if certain arrangements are contrived, abnormal or lacking a commercial purpose. If the main purpose is to obtain the super deduction then they will apply., for example, cancelling existing orders and replacing with similar orders after the 1 April 2021.
This analysis is based on the current draft legislation which may change as it passes through Parliament. Please also contact us if you have a specific situation or query so we can ensure that your expenditure will qualify.