A new super deduction

There were a few surprises in last month’s Budget, one of which was the announcement of a new super deduction! The relief is designed to stimulate business investment in plant and machinery and will be available for qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023.

How will it work?

At present relief for capital investment in plant and machinery is obtained via capital allowances. Capital allowances allow the cost of capital assets to be written down against a business’s taxable profits. They are available in place of accounting depreciation provided for in financial accounts. The majority of businesses enjoy 100% tax relief in the year of spend via the 100% Annual Investment Allowance which is available for the first £1million of qualifying expenditure (which remains at this level up to December 31st 2021).

The super deduction will provide 130% allowances on most new plant and machinery acquired by businesses, which would ordinarily obtain relief at the 18% main rate writing down allowances on a reducing balance basis. The aspect that makes the relief ‘super’ is that the relief obtained is more that the expenditure originally incurred.

The Chancellor used the example of a business spending £10million on qualifying plant and machinery, which will be able to obtain a tax deduction of £13million, which is a tax saving of £2.47million in the year of spend. The same expenditure currently would only qualify for the £1million Annual Investment Allowance and a 18% writing down allowance in that year, a tax saving of just under £500k.

A First Year Allowance of 50% is also available for those plant and machinery assets that qualify for the 6% special rate writing down allowances. This allowance isn’t as advantageous as the super deduction but will still be valuable for those investing in updating their premises, specifically on those assets qualifying as integral features.

There are some restrictions.

This relief is only available to companies within the charge to Corporation Tax and not all businesses.

Where the accounting period spans 1 April 2023, the rate will be apportioned based on the days prior to this date over the number of days in the period. If we use a 31 December 2023 year end as an example, the super deduction will be 107.4%.

The asset must be new and unused and is not available for contracts entered into before Budget day. The other restrictions follow the existing First Year Allowances exclusions, which means that the relief cannot be claimed in the year of cessation of trade, and excludes certain assets, mainly cars, long life assets and certain leased assets.

Anti-avoidance provisions apply to counteract any transactions lacking a genuine commercial purpose or those trying to abuse the relief.

Is there a clawback on disposal of these assets?

Any proceeds received on sale of an asset which qualified for the super deduction, will not be taken to the capital allowances pools but will instead be a taxable receipt, which is then multiplied by a factor 1.3. This potential clawback of the relief should not pose too much of a problem to companies as most assets will have significantly fallen in value by the time the asset is sold.

The above treatment of proceeds will not apply to the assets claiming the 50% First Year Allowance.

If you are planning on capital investment, then timing will be key to ensure you can benefit from the super deduction and first year allowances available.

We will be regularly updating the Budget pages of our website. If you would like to discuss the implications, please don’t hesitate to get in touch.