How super is the ‘Super-deduction’?
Senior Manager, Musa Sabo, casts a critical eye over the new Super Deduction rules available for ‘new and unused’ Plant and Machinery purchased between 1 April 2021 and 31 March 2023.
As announced in the 2021 Budget, there is a new capital allowance available for ‘new and unused’ Plant and Machinery purchased between 1 April 2021 and 31 March 2023.
Companies investing in qualifying new plant and machinery assets will be able to claim:
- a 130% ‘super-deduction’ capital allowance on qualifying plant and machinery investments, or;
- a 50% first-year allowance for qualifying special rate assets.
The super-deduction will allow companies to cut their tax bill by close to 25p for every £1 they invest.
Who is eligible to claim the enhanced capital allowances?
Companies that are within the charge to UK Corporation Tax are eligible to claim the enhanced capital allowances on qualifying plant and machinery assets. Partnerships and unincorporated businesses will not be eligible to claim the new First Year Allowance (FYA) rates; however, they are still entitled to claim the annual investment allowance.
Why has this scheme been introduced?
Now of course, we can only speculate as to why the Government has chosen to announce a scheme which, on the face of it, seems extremely generous.
This will of course stimulate new UK investment which combined with the current capacity to carry losses back up to three years, may even result in repayments of Corporation Tax. But, for Rishi Sunak to describe the move as “the biggest business tax cut in modern British history”, is political grandstanding at its best and disguises the sting in the tail that is to come for large businesses.
What the Chancellor fails to mention is this allowance is only required because he is about to subject large businesses to the biggest business tax increase in 50 years. And whilst his super ‘tax cut’ will only benefit companies that invest in capital assets, the increase in tax rate to 25% will affect every large business.
Whilst the 24.7p of every £1 invested sounds like a significant saving, this level of deduction has been specifically chosen with reference to the 25% rate that is effective from 1 April 2023. The concern from the Government is that companies will defer their expenditure on the acquisition of new plant and machinery equipment to after that date, to attract tax relief at 25% as opposed to 19%. Therefore, to encourage companies to bring forward their investment in equipment, the Chancellor announced a Super-Deduction First Year Allowance to complement the longstanding Annual Investment Allowance (AIA). AIA also enables 100% tax relief on the first £1m of capital expenditure until an extended date of 31 March 2023.
Worked example 1
As you’ll see set out below, in a straightforward example of a company incurring £500k of main pool qualifying expenditure, there would be a tax benefit of £28,500 by claiming the super-deduction.
Main pool qualifying expenditure = £500,000
- Deduction under AIA = (£500,000)
- Year 1 tax saving at 19% = £95,000
- Deduction under super-deduction = (£650,000)
- Year 1 tax saving at 19% = £123,500
Additional benefit due to super-deduction = £28,500
Apart from the enhanced expenditure, the other positive aspect of the super-deduction is that there is no limit on qualifying expenditure, unlike with AIA. It is also possible to shorten the financial year end of a company to benefit from the increased corporation tax savings earlier.
Worked example 2
As you’ll see set out below, in a further example where a company incurring £5m of main pool qualifying expenditure, there would be a tax benefit of £908,200 by claiming the super-deduction due to the limit of £1m for AIA.
Main pool qualifying expenditure = £5,000,000
- Deduction under AIA = (£1,000,000)
- The remaining £4m at 18% WDA = (£720,000)
- Year 1 tax saving at 19% = £326,800
- Deduction under super-deduction = (£6,500,000)
- Year 1 tax saving at 19% = £1,235,000
Additional benefit due to super-deduction = £908,200
Drawback – Disposing of assets which qualify for the super deduction or special rate allowance
If an asset on which the super deduction was claimed is disposed of before 1 April 2023, special provisions will apply to determine the amount of the balancing charge. The main and special rate pools are not adjusted for the disposal values and in calculating this value, the actual proceeds received must be multiplied by 130%.
This factor does not apply for any disposals in the chargeable period (which commences after 1 April 2023) As in most instances the balancing charge will be subject to a higher corporation tax rate of 25%. Considerations are also required in relation to disposals of assets that have qualified for the special rate allowance.
Therefore, even though assets claimed as either super deduction or special rate allowance do not enter the main or special rate pool at purchase, businesses must track all super-deduction and special rate allowance assets until they are disposed of, to ensure that the correct disposal value and balancing charge is applied.
Be aware that there is anti-avoidance legislation which can counteract the effect of the first-year allowance claimed if arrangements are entered into where the main purpose is to obtain a tax advantage.
Companies should consider the timing of their capital expenditure carefully to determine the potential cash flow benefits and how best to accelerate the tax savings.
The new enhanced deduction is in addition to the existing AIA, therefore companies may be eligible to claim both the AIA and the new FYA. This can create an attractive cash advantage for many companies who are planning on investing in plant and machinery, however careful consideration must be given to what tax relief is best to claim.
Companies who are planning on investing in plant and machinery of more than £1m in the next few years should consider taking advantage of the super deduction by bringing expenditure forward and incurring the costs before 31 March 2023.
However, note that companies planning to invest on a date close to 31 March 2023 may want to delay the spend to get the higher corporation tax rate savings at 25% and avoid the additional administrative burden.
For more information regarding the above, please contact Musa Sabo.