From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
Companies will be able to cut their tax bill by up to 25p for every £1 they invest. But the super deduction is not available to every business; it is targeted at companies, not unincorporated businesses. Unincorporated companies will have to continue to look to the Annual Investment Allowance (AIA), with its temporarily extended higher £1 million limit for major capital spending up to 31 December 2021.
The super deduction is temporary, lasting for two years. It works by giving first year tax relief in the form of capital allowances for expenditure between 1 April 2021 and 31 March 2023.
For assets that would normally qualify for 18% main rate writing down allowances, the super deduction gives first year relief of 130%. Assets normally qualifying for 6% special rate writing down allowances (such as integral features in buildings, like electrical and lighting systems) can qualify for a first year allowance of 50%.
But this 50% allowance is likely to be relevant only to companies that have used their AIA. Unlike the AIA, there is no cap on eligible expenditure. The rate of the deduction will be apportioned for a business making eligible expenditure in an accounting period straddling 1 April 2023.
Plant or machinery must be new, not used or second-hand, and expenditure incurred on contracts entered into before the Budget on 3 March 2021, does not qualify.
The general exclusions in existing legislation relating to first year allowances apply. Expenditure on cars, for example, and assets for leasing are excluded. This latter point means commercial landlords may benefit less than the initial publicity for the proposals might have led them to expect.
Rules on what happens when the assets are disposed of make the picture more complex. With disposal proceeds treated as a taxable balancing charge, these potentially clawback some of the previous benefits. It will be important to keep records of assets on which the super deduction is claimed. This is so they can be correctly treated on sale. For further guidance on this, please do get in touch.
Not in every case. As it sits alongside other tax measures, it is a finely balanced equation. The deduction is designed to incentivise investment now, with the corporation tax rate at 19%. But with the planned increase in corporation tax from 1 April 2023, when the super deduction ends, the outlook for your business may change.
The main rate of corporation tax is set to increase to 25% on profits over £250,000. Only companies with profits up to £50,000 will retain the 19% rate. Profits between £50,000 and £250,000 will be taxed on a sliding scale. Whether the super deduction significantly benefits your company will depend on the forecast level of capital expenditure; the type of asset; financing method; and your expected corporation tax rate.
With the AIA due to revert to £200,000 from 1 January 2022, and higher corporation tax rates in prospect, careful timing of major capital expenditure is more critical than ever. The new provisions on loss carry-back could also affect decision making.