How super is the 'super deduction'?
How super is the 'super deduction'?
As a result of measures announced at the 2021 Budget, businesses will now benefit from some significant capital allowance opportunities including, amongst others:
- The super-deduction (‘SD’) – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies;
- The 50% first-year allowance (‘FYA’) for special rate (including long life) assets until 31 March 2023 for companies;
- Annual Investment Allowance (‘AIA’) providing 100% relief for plant and machinery investment up to its highest ever £1 million threshold, until 31 December 2021.
Expenditure which does not attract the above allowances will either be added to the main pool or special rate pool and attract the usual annual writing down allowances (WDAs) of 18% or 6% respectively.
The 100% AIA remains unchanged and can be used to relieve expenditure not eligible for the 130% SD allowance.
130% super–deduction allowance
This temporary tax break is available for new qualifying plant and machinery purchased between 1 April 2021 and 31 March 2023, but only where the contract for the plant and machinery (including fixtures installed under a construction contract) was entered into after 3 March 2021 and expenditure incurred after 1 April 2021.
It is important to appreciate that only new and unused assets (excluding cars) which would ordinarily be included in the 18% main pool for WDA’s qualify for this enhanced deduction. Additionally, this relief only applies to companies. Sole traders and partnerships will continue to rely on the AIA to maximise relief.
Broadly, the SD allowance means that the tax relief on £100,000 of eligible expenditure would be £130,000 with a consequential corporation tax saving of £24,700 (19% x £130,000) i.e. a saving of almost 25%.
How does this compare to the previous regime? As can be seen from the following example, there could be a significant difference in the tax savings.
Assume that a company makes an investment of £10m on qualifying assets during the year ended 31 March 2022. The deductions from profits and corporation tax savings for the year with and without the SD allowance would be as follows:
- Deduct AIA allowance of £1m
- Deduct WDA’s at 18% on the £9m allocated to the main rate pool* = £1.62m
- Total deductions of £2.62m giving a tax saving at 19% of £497,800
*remaining relief to be obtained in subsequent periods
- Deduct £13m (130% x £10m)
- Tax saving at 19% of £2.47m
In the 2021 Budget the Chancellor announced an increase in the rate of corporation tax to 25% from April 2023 for those businesses with taxable profits of £250,000 or over.
It has been widely observed that the 30% SD element (i.e. the 30% uplift on the expenditure) seeks to compensate companies for accelerated capital expenditure. This is because without the uplift, such expenditure would normally be relieved at the current 19% corporate tax rate as opposed to the higher 25% corporation tax rate from 1 April 2023.
As seen above, the effective corporation tax rate on eligible investment before April 2023 is almost 25% (130% x 19% = 24.7%) – broadly equivalent to the rate of relief available post 1 April 2023 for companies with taxable profits exceeding £250,000.
For those smaller companies with taxable profits under £50,000 in profits there is a definite tax advantage in purchasing qualifying plant and machinery before 2023, but for larger companies they are likely to be able to secure essentially the same tax saving in the future.
Where companies are likely to have taxable profits between £50,000 and £250,000 the tax savings may not be as clear cut and individual circumstances should be considered.
Of course, tax is only one consideration in the timing of capital expenditure, where the commercial needs of the business should always be the first priority.
Clawback on disposals
Although the Government is trying to encourage early investment to boost the economy with the SD allowance, they have included a subtle twist.
The 130% SD may not represent an absolute tax saving because of what happens on the subsequent sale of the qualifying assets.
It should be noted from the outset that assets eligible for the SD allowance are not added to the main pool for capital allowances purposes. This means that a balancing charge will arise when the asset is disposed of.
Any sale of an SD asset before 31 March 2023 will be subject to an enhanced disposal value calculated by multiplying the actual disposal proceeds by 1.3. A tapered multiple will be applied to disposals in accounting periods which straddle 1 April 2023.
50% first year allowance
Between 1 April and 31 March 2023, a 50% first year allowance (FYA) has also been introduced for purchases of new special pool items, such as some integral features (e.g. air conditioning, electrical systems, heating and cold water systems and lifts). This is referred to as the special rate (SR) allowance expenditure.
The SR allowance gives relief at 50% of the qualifying cost in the first year with the balance going into the normal special rate pool to be written down at the usual 6% rate in future years.
As with the SD allowance, on the disposal of SR assets a balancing charge is triggered in the period of disposal. The amount to bring into account as a balancing charge is the relevant proportion of the disposal value; broadly this will be 50% assuming the full SR allowance has been claimed.
Possibly not since the Second World War has a Chancellor managed to get people so excited about changes to the capital allowances regime and make business want to embark on a capital expenditure spending spree. However, on closer inspection the tax outcomes may not be as attractive as the headlines suggest – companies who are likely to pay corporation tax at marginal rates from 1 April 2023 may miss out on a potential higher tax savings by accelerating their expenditure; the disposal clawback rules could mean the real value of tax savings is considerably reduced if the asset has a short economic life. It may even be more efficient for a company in some circumstances to simply utilise their AIA.
Capital allowance decisions now are much more complicated. If you are considering incurring any capital expenditure as part of your Big Picture Plan and would like advice on the potential tax savings, let us help you fully understand the implications so you can make an informed decision. Get in touch before splashing the cash!
Get in touch with our team on 01892 546546 to find out how we can help you.