Super Deduction Balancing Charge

As this allowance comes to an end on 31st March 2023, we’re looking at the Super Deduction Balancing Charge.

David Lawson, of Croner-i Taxwise, runs through the legislation.

Q:

“My client claimed super deduction expenditure on £500k piece of machinery during the APE (Annual Premium Equivalent) 31^st January 2022. While the asset is till operating, there has been a major downturn in profits generated from the IT (Income Tax), therefore the company are considering selling it for £400k to inject some cash flow, but they are undecided whether this will take place in the current AP (Accounts Payable) to 31^st January 2022 or in the subsequent period(s).

What will the proceeds be if the machinery disposed on the following dates?”

A:

The legislation for a super deduction disposal is provided under FA 20221 S12.

The person who incurred the super-deduction should be liable to any balancing charge in respect of any relevant even occurring S12(2). A relevant event would include a sale of the machinery. CAA 2001 S61. The Company is liable to the balancing charge.

You need to establish the relevant proportion subject to the super deduction disposal. S12(3).

The expenditure needs to be split between the value claimed in respect of relevant super-deduction expenditure and the total expenditure to find the relevant proportion S12(4)(5). In this situation, the whole amount of £400k would be the relevant proportion as the company originally claimed a super deduction on the entire £500k expenditure incurred in the relevant period.

The balancing charge calculation will depend on the timing of the disposal. The relevant factor is reduced for disposals occurring after 1^st April 2023 to reflect the increase in corporation tax rates from 19% to 25%. The principle being that relief was given at 24.7% (130% at 19%) and so the clawback should be commensurate.

On 23^rd September 2022, the Chancellor at the time announced there would be a freeze on corporation tax rates at 19% from 1^st April 2023, therefore legislation would need to be changed for the relevant factor to be in 1.3 on any super deduction disposal. However, on 14^th October 2022, the Prime Minister announced abolished the CT tax rates freeze. This means no legislation change will be required for FA21 S12 and relevant factors will be calculated as below.

If the chargeable period commences before 1^st April 2023 and there are no dates in the chargeable period after 1^st April 2023, the relevant factor in the calculation is 1.3. FA 2021 S12 (6)(7).

Therefore, if your client sells this asset on 30^th September 2022, the balancing charge calculation will be as follows:

£400k @ 1.3 = £520k

If your client sells the asset on 30^th June 2023, you will need to find the relevant factor between the days before 1^st April 2023 and after that day. FA21 S12(8).

Number of days before 1^st April 2023 = 59

Number of days after 1^st April 2023 = 306

59/365 = 0.16164384

0.164384 x 0.30 = 0.04849315

0.04849315 + 1 = 1. 04849315

£400k @ 1.0489315 = £419,572

If the asset is sold on the 1^st March 2024, you would have no dates before the 1^st April 2023 meaning the disposal value would just be £400k as you would arrive at the relevant factor of 1.

If the Company had only claimed £300k as super deduction with £200k balance allocated to the main pool. To find the relevant proportion, you divide the £300k/£500k giving you 60% with that used against the disposal value of £400k = £240k. This amount would be then carried down for the relevant factor calculation. The 40% disposal balance would be allocated to the main pool. FA 2021 S12(3)(4)(5) (10).

You can also review HMRC’s guidance at CA23171 and Croner-i guidance at Croner-i 237-623.

You can also read more about our insights into the super-deduction tax.

Article by David Lawson | cronertaxwise.com