Contents

International

The Anson problem is not just for individuals – Andrew Parkes

Crypto

The world of NFTs – a tax perspective – Zoe Wyatt

Location of Cryptoassets – Latest English Court Case – Zoe Wyatt and Helen Siqin 

Tax Dispute Resolution

Andersen Freedom of Information (FOI) Request on “nudge” letters – Andrew M Park

Corporate

How super is the ‘Super-deduction’? – Musa Sabo

International

The Anson problem is not just for individuals 

We were reminded recently that the difference in treatment of US Limited Liability Companies (LLCs) by the UK and the US can have an impact for companies as well as individuals. With companies the difference can be starker and, given the general operation of the UK/US double taxation agreement (DTA), hard to justify.

As a reminder, US LLCs are generally treated as partnerships or disregarded entities for US tax, whilst they are treated as companies by the UK. This difference in treatment can lead to actual double taxation in situations where a little tweak could lead to single taxation either via exemption or double taxation relief (DTR).

The obvious question to ask then is why not make that tweak? In many cases the UK member of the LLC facing double taxation has only a minority interest and the majority (usually US based) are quite happy with the LLC as intended.

Mr Anson was able to persuade the First Tier that DTR was available with respect to the US income of his LLC, but that may not be available to everyone. We know some agents believe that the Anson decision is carte blanche to claim DTR for LLC income, but I am much less sanguine. If/when Anson 2 rolls around, my money is on HMRC to level the score.

Back to companies. Our client had a UK company that was investing in a number of US LLCs that were carrying on trades in the US. Under the UK/US DTA, the US is able to tax the UK company as if it was carrying on the underlying trades due to the operation of Article 1(8) of the DTA. This allows the US to tax UK residents where the US sees the UK person as receiving the relevant income, even if the UK sees someone else, which here it does.

The UK sees the “top” LLC and, as that LLC is not UK resident and has no UK source income, the UK does not see anything to tax. Therefore, the UK company has nothing in the UK to set the US tax it has paid against. So far, so Anson.

Now, we are looking at companies, and the UK has the Distribution Exemption (DEx). With Mr Anson, HMRC’s view was that the distributions he received from the LLC were taxable as dividends upon him. Here, for UK purposes, the US LLC has paid a dividend to the UK company. As a portfolio investor (holding less than 10%), if the UK company was not small (so at least 50 employees with either turnover and/or balance sheet total of more than €10mn) then the DEx would almost certainly exempt the distribution from UK tax.

This is fair treatment – the US business profits have been taxed once in the hands of the UK company. There will be a second level of taxation when that dividend is passed to the shareholders of the UK company, but that would be the same if the UK company ran a UK business.

However, the situation is horribly different for a small company using the small company DEx. The first criterion of this DEx is that the taxpayer has to be resident in a qualifying territory (and the US is a qualifying territory) – but is the LLC resident in the US?

To be resident it has to be “liable to tax there by reason of its domicile, residence or place of management…”

The important wording is “liable to tax”. This phrase is not defined by UK legislation, but we understand that HMRC interprets “liable to tax” for the DEx as they would for DTAs (i.e. the company is capable of being taxed in the relevant country, not that it actually pays tax there).

For example, a charity is liable to tax in the UK although it generally pays no tax. This is because a charity is first and foremost a company and it is only exempt from tax if it and its income meet certain criteria. The charity is said to be liable to tax.

In contrast, a UK partnership is not liable to tax as it is not capable of being taxed here – the partners are instead.

This is not to be confused with the expression “subject to tax” which requires the relevant person or income to be charged to tax even if no actual tax is paid, say, due to losses carried forward. A discussion of liable and subject to tax is at the heart of Paul Weiser v HMRC ([2012] UKFTT 501 (TC)) that rested on whether his UK pension was subject to tax. Spoiler alert – it wasn’t.

US LLCs are inherently transparent for US tax, unless they have “checked the box”. Where they have more than one member (like here) they are partnerships and the US view of partnerships is the same as the UK (in this instance). The LLC is not itself liable to tax in the US and, therefore, the Small Company DEx is not available for distributions paid by a LLC.

This brings in a horrible cliff edge. As mentioned above, Article 1(8) of the UK/US allows the US to tax the US source income of the UK company, so everyone is happy that the underlying income is being taxed by the correct country. Nothing is being avoided. Further, the UK is happy for the DEx for non small companies to apply in this situation. Now, consider you are a company with 51 employees but two resign leaving you with 49; if those employees are not replaced, you risk becoming taxable on distributions from US LLCs due to no action on your part and for no obvious policy rationale. (Admittedly you have to have 49 employees for two years, but the principle is the same.)

Now, the US taxes the business income of the LLC upon the UK company, the UK taxes the distributions from the US LLC but gives no relief for the US tax paid on the profits – the UK company cannot even claim the benefits of underlying tax relief in respect of the tax on the profits as the shareholding has to be a minimum of 10% for this to kick in. We have actual double taxation, as with Mr Anson, if he had not won his case. Then, when the UK company pays dividends to its shareholders, there is a third instance of taxation.

This is something that is easily fixed by a tweak to the small company DEx. Extend the first criterion so that the payer is either resident in a qualifying territory or the profits out of which the distribution are paid have been liable to taxation in a qualifying territory. This brings the treatment in line with Article 1(8) of the UK/US DTA and equivalent provisions in other DTAs. Without it, corporate portfolio investors in US LLCs are unfairly penalised compared to their larger brethren.

If you have any questions regarding the UK treatment of LLCs, the UK/US DTA or the Distribution Exemption, please contact Andrew Parkes:

Andrew Parkes
National Technical Director
M: +44 (0)7522 229 589 or
E: andrew.parkes@uk.Andersen.com

Crypto

The world of NFTs – a tax perspective

NFTs are hot right now. Some articles suggest NFT sales grew 21,000% in the last 12 months and the market was worth $40bn in 2021, making a sizeable dent in the overall $2trn crypto market.

In our view, the main reason for this growth is that millennials are now keen to get into crypto, and NFTs are more relatable to a demographic interested in creativity, art, gaming, etc., than DeFi, blockchain and web3.

One of the reasons for the increase in our NFT work may be because cryptocurrency is in a bear market (despite Bitcoin rallying recently); startups may not raise as much as desired through the issue of native tokens in the current climate. Instead, they may issue NFTs, which are usually issued for a specific purpose with a much smaller number in circulation as compared to native utility tokens. NFTs can even be structured such that they could be redeemed or exchanged for – or give a right to acquire at a discounted price – utility tokens later. Some also hold the view that issuing one’s own NFT from a UK company is not a regulated activity, negating the need (at least temporarily) for expensive and complex offshore structures.

There remains, nonetheless, a lot of misunderstanding over what an NFT is and what benefits or rights it confers on the holder.  And seemingly not just within the professional services sector and investor market, but within the crypto industry itself.

Our clients are using NFTs in various different ways and, over the past 24 months, we have had a lot of debate over how and when they should be taxed.

When assessing the tax consequences for the client we first identify:

• all the primary stakeholders to the transaction; and
• the attributes of the NFT(s).

Example primary stakeholders

• The creator
• The buyer who may then become a reseller
• The NFT holder could lend or stake their NFTs with a DeFi platform
• The DeFi platform itself
• The DeFi platform may then repurpose the NFT
• Gaming platforms

Example attributes

• Restricted Digital: The NFT does not embody an original digital asset, but rather a copy thereof with restrictions or limited rights attached.  Ownership in the original digital asset is not transferred. For example, artwork, music, sports clips, digital wearables.
• Unrestricted Digital: The NFT embodies the original digital asset. The NFT holder is the owner of the original digital asset and can exploit it in any way desired. Artwork, other collectibles, digital wearables, gaming certificates, non-sovereign information / data.
• Real World Goods or Services: The NFT can be redeemed for physical goods (e.g. investment wine and spirits, merchandise etc.) or real world services (e.g. spa day, airport lounge access, ticket for an event). The NFT may cease to exist post redemption.
• Hybrid: Combination of any of the above. For example, an NFT that is redeemed for a real world good could provide the holder access to future merchandise “drops” and would still have a utility and some value even after redemption of the valuable goods.

Identifying gains and/or revenue streams

Identifying all the stakeholders and attributes is important as it allows us to identify all the potential gains or revenue streams for the client. It allows us to assess:

1. what rights the NFT carries;
2. how money (or money’s worth) is made from the NFT; and
3. who in the transaction is making money (or money’s worth) from it.

For example, our client may be the creator of an NFT that it sells to the buyer.  The client will ordinarily have revenue from the NFT sale.

The buyer, however, may be permitted to do things with the NFT from which the creator receives a fee.  The buyer could simply be allowed to resell the NFT, and the creator receives a cut of the secondary sale.

Or the buyer may take the image of the NFT and utilise it for another purpose. For example, the buyer could take the image and use it to create a new image or piece of digital art. The buyer could then create his own NFT over the new image that comprises the original image.  The creator could receive fees from sales of the buyer’s new NFT.

Following this assessment, we can form a view as to the character of the transactions for direct tax purposes; gains, revenue, royalty etc. and apply a principles-based approach to determine the tax outcome.

The most difficult part is assessing the indirect tax consequences.  For example, the supply of certain NFTs (e.g. digital artwork) may be an electronically supplied service for VAT purposes.  In a B2B context, the obligation is on the customer for most territories.  In a B2C context, the obligation is on the seller to register for VAT in its customer’s location.  In most cases, the seller does not have the customer’s location information.  According to HMRC guidance the seller needs to make presumptions with at least two pieces of evidence supporting their presumption.  For example, taking the customer’s IP address and asking the customer to confirm their location. If the two match, then the seller registers for VAT in that location. If the two do not match, the seller is supposed to take further action to confirm the customer’s location.  Most NFT sellers do not have this information and to ask such questions is not commercially viable.  So alternative approaches need to be adopted.

There is further complexity where the seller is not the creator but a marketplace.  Other complexities include sales tax in the US; it is state regulated, and each state has their own definition of taxable supplies and digital services.

Right now, there is insufficient guidance from HMRC (or other tax authorities) on what NFT sellers should be doing.  A view will need to be formed and we can make those recommendations.

Tax turns on the smallest of facts and this process allows us to extract all relevant information.

If you want to discuss further, please contact our Head of Crypto, Zoe Wyatt:

Zoe Wyatt
Partner
M: +44 (0)7909 786 144 or
E: zoe.wyatt@uk.Andersen.com

Crypto

Location of Cryptoassets – Latest English Court Case 

On Friday 25th of March 2022, the High Court handed down its judgement in Tulip Trading Limited v Bitcoin Association^[1] and dismissed the highly-publicised multi-dollar claim brought against bitcoin software developers. The Court has, however, concluded that the residence or place of business (rather than domicile) is the test to apply when assessing the situs of cryptoassets.

The Claimant, Tulip Trading Limited (TTL), is a company incorporated in the Seychelles. Its CEO is Dr Craig Wright who is an Australian citizen who has been a UK resident since 2015. The claim relates to a very substantial amount of digital currency assets that TTL claims to own but is currently unable to control or use, following an alleged hack of computers located at Dr Wright’s home office in Surrey.

None of the defendants are in the UK, and have challenged the jurisdiction of the English courts. The court had previously ordered TTL to provide security for costs in respect of the claim against the defendants.

The Facts

TTL serves as a holding company, beneficially owned by Dr Craig Wright, who claims to be the creator of Bitcoin under the pseudonym of “Satoshi Nakamoto”. It is alleged that he was subject to a computer hack, and lost access to more than US$4.5 billion worth of Bitcoin and other cryptocurrencies. TTL claims that the software developers owe tortious and/or fiduciary duties to re-write the software in order to enable access to the cryptocurrencies. If they fail to do so, he seeks the value of the cryptocurrencies from the developers.

In the latest jurisdiction hearing the court gave consideration for the location of cryptoassets.

Location of Bitcoin

TTL maintains that the Bitcoin held at the 1Feex and 12ib7 addresses constitute property, that the claim relates to that property and that it is located in the UK. It did not seek to rely on the private keys themselves constituting property.

The Judge was satisfied that crypto assets are property having relied on the Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce in November 2019, and the views expressed in cases that have considered the issue.

However, the Defendants challenged TTL’s claim that the Bitcoin should be regarded as located in the UK. TTL’s position is that the Bitcoin should be located in the UK following TTL’s residence rather than domicile.

TTL is a Seychelles incorporated entity, and its country of domicile is its place of incorporation – Seychelles. Its place of residence is the key determining factor in this case, being the place where its central management and control is exercised.

The court considered the principle established in the Ion Science^[1] case and Professor Andrew Dickinson’s book Cryptocurrencies in Public and Private Law^[2]. It concluded that the discussion in Professor Dickinson’s book does not in fact refer to the location of cryptoassets to domicile. The court observed that the book made the comparison between cryptoassets and goodwill, and refers to the lex situs rule for that, which is where the business is situated.

Furthermore, the court observed that the distinction between domicile and residence or place of business appears not to have been material in Ion Science, and Butcher J referred to both resident and domicile in the same judgement, strongly indicating that he was not intending to confirm that domicile was the sole relevant test.

The court concluded that the residence or place of business were the correct test for the situs of cryptoassets in this case.

In reaching the conclusion that TTL is a resident of the UK, the court noted that a company is resident where its central management and control is located, that being where its “real business” is carried on. In this case, TTL has no active business – its sole function appears to be to act as a vehicle to hold digital assets. TTL claimed that Dr Wright had power to access and control its assets from his home office in Surrey, and that he or his wife were TTL’s CEO and controlled TTL via those means (although they were not directly appointed as directors).  It is not clear to what extent, if at all, there was any conscious decision-making to that effect.

The claim to be resident here therefore appears largely to depend on management and control having been manifested by the fact that Dr Wright and/or his wife did not deal with the assets, but had the ability to do so. The court accepted TTL’s argument that it is a resident in the UK on the basis that Dr Wright had the ability to deal in the assets held by TTL from the UK and determining not to do so can be described as an exercise of control.

The court also noted that the only alternative to England is Seychelles, and it is hard to argue that TTL is resident in a place where its directing minds have never visited, it keeps no books and records, and where it appears not even to have filed accounts.  The court therefore concluded that TTL is resident in the UK, and that the cryptoassets are located here.

What are the implications of this decision?

The location of a cryptoasset can be important for a number of reasons, especially for non-domiciled taxpayers who claim the remittance basis to shield their unremitted foreign income and gains from UK tax.

HMRC updated their guidance in December 2019 and expressed their view that situs of exchange tokens will track the residence of the holder for the purposes of all taxes. In other words, Bitcoins held by UK resident but non-domiciled taxpayers will be treated as UK assets and gains from the sale of these Bitcoins will be subject to UK capital gains tax.

Judgement in this case seems to confirm that the residence test should be applied when assessing the location of cryptoassets rather than domicile.

If you have any questions regarding Cryptoassets, please contact Zoe Wyatt or Helen Siqin:

Zoe Wyatt
Partner
M: +44 (0)7909 786 144 or
E: zoe.wyatt@uk.Andersen.com

Helen Siqin
Senior Manager
M: +44 (0)7496 410 120 or
E: helen.siqin@uk.Andersen.com

Tax Dispute Resolution

Andersen Freedom of Information (FOI) Request on “nudge” letters

Information obtained from HMRC under our FOI request reveals that to date HMRC has issued nearly 177,000 “nudge” letters in respect of offshore income or gains since they started the practice with less than a 1,000 in the 2016/17 tax year.

This is thought to be the first time that HMRC has released public statistics on the actual number of offshore “nudge” letters issued, despite a general awareness amongst advisors that HMRC has sent thousands each year for the last several years.

The figures also reveal that the number of offshore income or gains letters issued by HMRC peaked in the 2018/19 tax year, with 53,327 letters sent out. There has since been a dramatic decline, with only 28,609 letters issued in the 2020/21 tax year and only c. 13,000 so far in the current tax year.

Commenting in our press release, Andrew Park, our Tax Investigations Partner said: “This is the first time that HMRC has been transparent about the number of “nudge” letters sent to the taxpayer in recent years. Although 177,000 may seem impressive, it is not a hugely surprising figure – “nudge” letters are cheap for HMRC to generate as they rely on computers automatically cross-comparing intelligence information with that already disclosed in submitted tax returns.

“The number of letters issued by HMRC will most likely stabilise at something around the current year level, due to the speculative nature of most “nudge” letters. There is a churn of new people with overseas connections coming to the UK, and there is a seemingly endless succession of data leaks from overseas service providers yielding new data – such as the recent “Pandora Papers”.

“It should be stressed too that although “nudge” letters are an undeniably efficient use of HMRC’s scarce resources, they entirely depend on taxpayers knowing that they have – or might have – something to declare.”

Offshore income and gains “nudge” letters were HMRC’s first major “nudge” letter initiative, further to its pioneering use of applied behavioural science to improve taxpayer compliance.

HMRC began to issue offshore “nudge” letters due to the unprecedented amounts of data that it had started to receive over the previous decade from leaks from offshore banks, trust companies and law firms. The methodology was initiated in anticipation of a deluge of further data from information transparency and exchange initiatives such as the Common Reporting Standard (CRS). The peak in offshore “nudge” letters – 2018/19 – coincided with a deluge in new information from the CRS.

The number of “nudge” letters issued reflects not just the mass of new offshore related information HMRC is receiving, but also the inherent problem that it has in using technology to try to automatically cross-compare calendar year information provided to it from overseas – where calendar year fiscal years are the CRS format or are otherwise the norm – with the UK’s fiscal year.

Anybody receiving an offshore “nudge” letter should stay calm, allow for the fact that HMRC’s simplistic checks might not be sufficient to confirm that they are tax compliant, but take the letter seriously and seek professional advice to confirm whether anything might have been overlooked or misreported.

Crypto “nudge” letters are just getting going

Meanwhile, an FOI to HMRC from wealth management firm Quilter has shown that initial HMRC “nudge” letters to crypto investors in 2021 were “only” sent to 8,329 out of maybe hundreds of thousands of people now investing in crypto.  However, a few things to bear in mind:

• the initiative only started in October 2021 (for comparison, the information referred to above shows that HMRC only issued 951 “nudge” letters in the first reporting year which they sent to offshore investors, but issued over 40,000 the following year);
• most crypto investors have invested less than £1,000 and are of no interest to HMRC re Capital Gains Tax unless and until they realise gains of £12k or more (i.e. above their annual exemptions);
• HMRC’s information is still patchy and comes from bulk information notices to some UK crypto exchanges for sample periods only + some similar information provided from overseas – but HMRC are rapidly building a fuller picture;
• given how selective HMRC have apparently been so far, existing recipients should be doubly worried and get their positions checked out urgently.

FOI request reveals Treasury’s misleading £100m “investment” promise in Covid Taxpayer Protection Taskforce

In data released by HMRC to Andersen under a further FOI, it is revealed that the UK Government’s promised £100m “investment” in the Covid Taxpayer Protection Taskforce consisted merely of the re-tasking of existing HMRC staff from other duties.

The £100m is broadly equivalent to HMRC’s existing payroll for the staff members transferred to the Taskforce.

Data released for the first time to Andersen also reveals the exact composition of the Covid Taxpayer Protection Taskforce in terms of current headcount, which department’s staff were recruited from, and a breakdown by grade of members of the core team.

The Covid Taxpayer Protection Taskforce, announced by the Chancellor in the March 2021 Budget, was established to investigate and bring to account those who have misused the government assistance schemes introduced during the pandemic.

Commenting on this news in our press release Andrew said, “The much-trumpeted £100m “investment” in a Covid Taxpayer Protection Taskforce was clearly just political spin.

“It is also hard to believe that HMRC is able to fill the donor departments during the two-year lifetime of the taskforce – after which, staff will be back to other duties anyway. It doesn’t ring true and is the sort of smoke and mirrors accounting HMRC would investigate if the taxpayer got up to it.”

The data shows that the Taskforce consists of 1,265 people, of whom 1,101 were full-time equivalent on 31 January 2022. There was not one hire of external talent or expertise from the private sector or elsewhere in the Civil Service, and less than 15% were drawn from HMRC’s Fraud Investigation Service.

It also reveals that of the people for whom HMRC could provide a grade breakdown, staff were overwhelmingly at the most junior investigator and clerical grades, trained and capable of dealing with simple enquiries but not complex matters.

The following table shows a breakdown of staff recruited into the Taxpayer Protection Taskforce and their origins within HMRC:

Andrew added: “HMRC has put together a lot of people, but the Taskforce smacks of low-grade trawling with a large net with a broad mesh. HMRC simply does not have enough highly skilled and experienced fraud investigators for the scale of what they have to deal with generally – even before Covid – and to the limited extent they have been able to transfer them to this Taskforce, their skills will be sorely missed elsewhere.

“The Treasury is inevitably going to be disappointed with what the Taskforce can achieve but should look to itself first for failing to resource HMRC better.”

Please contact Andrew M Park for additional information with respect to this article:

Andrew M Park
Tax Investigations Partner
M: +44 (0)7956 715 098 or
E: andrew.m.park@uk.Andersen.com

Corporate

How super is the ‘Super-deduction’?

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.

Anti-avoidance

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.

Recommendations

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:

Musa Sabo
Senior Manager
M: +44 (0)7969 511 703 or
E: musa.sabo@uk.Andersen.com