The new super deduction aims to incentivise company expenditure and investment now as the country emerges from lockdown in the hope that companies will hit the ground running, says PKF-FPM Tax Director Malachy McLernon.
The government has offered unprecedented support for businesses during Covid. Two recently announced temporary first-year capital allowance measures take this financial support even further by giving companies investing in qualifying equipment a more beneficial tax deduction in the year of purchase than they would otherwise receive. The Super Deduction and Special Rate (SR) allowance, announced by Chancellor Rishi Sunak in March, aims to stimulate business investment and promote economic recovery as society moves out of lockdown.
Super Deduction Scheme | Are you Eligible?
To claim the Super Deduction allowances, a company must be within the charge to Corporation Tax.
Expenditure on qualifying assets must be incurred between 1 April 2021 and 31 March 2023 and the allowances only apply to contracts entered into after 3 March 2021.
What Expenditure Qualifies for Super Tax Deduction?
> Super Deduction Qualifying Capital Expenditure
The Super Deduction applies to new plant and machinery that ordinarily qualifies for the 18% main pool rate for writing down allowances. Examples of qualifying plant and machinery include:
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Foundry equipment
- Vehicles used for trading purposes (not cars)
The SR allowance covers new plant and machinery that qualifies for the special rate pool which includes integral features in buildings and long-life assets.
Each of the following is an integral feature of a building or structure:
- An Electrical System (including a lighting system);
- A Cold Water System;
- A Space or Water Heating System, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system;
- A Moving Walkway such as a lift or an escalator;
- External Solar Shading.
- Solar Panels
> Super Deduction Excluded Expenditure
Claims for the new allowances will be ineligible where expenditure is incurred:
- in a chargeable period where the qualifying activity is permanently discontinued.
- on the provision of plant or machinery for leasing.
- on assets acquired for purposes other than those of the qualifying activity.
- on assets acquired by way of a gift.
The Super Deduction Rate of Relief
The new Super Deduction has been brought in with the higher Corporation Tax rate of 25% in mind. The Government does not want companies to defer expenditure on the acquisition of new machinery and plant equipment in order to attract tax relief at 25% as opposed to 19%.
Mindful of this, the Chancellor has announced a Super Deduction First Year Allowance (SD FYA) which will complement the existing Annual Investment Allowance (AIA). AIA enables 100% tax relief on the first £1m of capital expenditure and has been extended until 31 December 2021.
How the SD FYA works is that it treats the company as having spent 30% more on the capital expenditure than it actually has spent. Therefore, if a company buys a piece of equipment for £100k, it is treated as having spent £130K.
If you multiply £130k by 19%, it equates to approximately £25k of tax relief and therefore by investing in plant and machinery now, the company is getting virtually the same tax relief as it would if it deferred its expenditure plans until April 2023. This is why the SD FYA has been introduced, only for companies.
The SR allowance extends the first-year allowance for eligible special rate assets to 50% relief with the balance written down at the normal 6% rate in future years.
How the Super Deduction works with the Annual Investment Allowance
The Annual Investment Allowance (AIA) already provides 100% relief for costs of qualifying plant and machinery in the year of purchase. For 2021, the AIA level has been set at £1million per business. It will revert to £200,000 from January 2022.
The Super Deduction and Annual Investment Allowance cannot be claimed on the same amount of qualifying expenditure. It would be a more sensible approach to prioritise the Super Deduction if at all possible. This does not mean that the AIA should be ignored. Consider the situation where a contract has been completed prior to 3 March 3 2021, or expenditure predating 1 April 2021. In these situations, the AIA is a very welcome safety net.
Companies who invest in refurbished or second-hand equipment will not be able to claim the Super Deduction as these assets do not qualify under the scheme. They will, however, be able to make a claim under the AIA rules up to 31 December 2021.
Super Deduction Example
|PREVIOUS SYSTEM ||WITH SUPER-DEDUCTION |
|A company spends £10m on qualifying assets |
Deducts £1m using the AIA in year 1, leaving £9m
Deducts £1.62m using WDAs at 18%
Deductions total £2.62m – and a tax saving of 19% x £2.62m = £497,800
|The same company spends £10m on qualifying assets |
Deducts £13m using super-deduction in year 1
Receives a tax saving of 19% x £13m = £2.47m
|Source: HMRC Budget 2021 Super-Deduction Factsheet |
What if Qualifying Assets are Subsequently Sold?
As was the case previously, the new first year allowances operate to accelerate the rate at which tax relief is realised. While the disposal values for plant and machinery are arrived at in the same way as before, a key difference is that when assets are sold, expenditure on plant claimed for the Super Deduction or SR allowance will be subject to a balancing charge.
If bought and sold in the 2-year period ending in April 2023, the disposal proceeds are increased by a notional 30%. Should the disposal take place after April 2023, the 25% Corporation Tax rate will apply even though the original relief was given against the current 19% Corporation Tax rate. The main and special rate pools are not adjusted for the FYA disposal values. Note that it will be important to keep track of all allowances claimed for capital expenditure up to and including the disposal of the relevant assets in order to ensure that the correct balancing charge is applied.
Tax Efficient Planning – Careful Planning Reaps Rewards
Carrying Back Trading losses
It is worth bearing in mind that the Government has also temporarily extended the period over which businesses may carry trading losses back for relief against profits of earlier years to get a repayment of tax paid. This measure applies for accounting periods ending in the period 1 April 2020 to 31 March 2022 (and for tax years 2020–2021 and 2021—2022 for unincorporated businesses).
Corporation Tax Rate
With the Corporation Tax rate set to increase to 25% from 2023, careful planning will be needed to ensure that capital allowances and loss claims are managed in a tax-efficient manner. Up to now, there was always a fear that companies would defer capital expenditure until April 2023 to avail of the higher rate of tax relief. However, the introduction of the new temporary capital allowances means that there is now no financial incentive to hold off purchasing new equipment. The knock-on effect of this on the economy is likely to be significant. By incentivising company expenditure and investment now as the country emerges from lockdown, the hope is that companies will hit the ground running. This should have a positive impact on job-retention and help announce to the world that the UK is emerging from the pandemic in relatively good shape and open for business.
Capital Allowance Eligibility
| ||Plant and machinery ||Structures & Buildings |
| ||Bought new ||Bought second hand ||Assets held for leasing ||Main rate assets ||Special rate assets ||New disposal rules || |
|Super-deduction (130% FYA) ||✔️ || || ||✔️ || ||✔️ ||N/A |
|Special Rate FYA (50% FYA) ||✔️ || || || ||✔️ ||✔️ ||N/A |
Investment Allowance (100% up to £1m)
|✔️ ||✔️ ||✔️ ||✔️ ||✔️ || ||N/A |
|Writing down |
|✔️ ||✔️ ||✔️ ||✔️ || || ||N/A |
|Writing down |
|✔️ ||✔️ ||✔️ || ||✔️ || ||N/A |
|Freeports (100% ECA, |
|✔️ || || ||✔️ ||✔️ || ||N/A |
|Structures & Buildings Allowance (3% pa) ||N/A ||✔️ |
|Freeports (SBA 10% pa) ||N/A ||✔️ |
|Source: HMRC Budget 2021 Super-Deduction Factsheet |