The super-deduction comes in as company investment reduces further during the pandemic. Running from 1 April 2021 until the end of March 2023, it is hoped the 130% capital allowance will encourage businesses to invest more.
For expenditure incurred, companies can claim 130% capital allowances on qualifying plant and machinery investments. For every pound a company invests they can claim back up to 25p on their taxes.
Low business investment has played a significant role in the slowdown of productivity growth since 2008. Between Q3 2019 and Q3 2020, business investment was reduced by 11.6%.
Capital allowances have been made more generous as a result, as a way to encourage businesses to invest and grow.
There are four new capital allowance measures in place for businesses to benefit from:
The super-deduction offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023.
Companies can benefit from the 50% First-Year Allowance (FYA) for special rate (including long life) assets until 31 March 2023.
Annual Investment Allowance (AIA) provides 100% relief for plant and machinery investments up to the highest ever threshold of £1 million until 31 December 2021.
Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+). Companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026.
Capital allowances allow taxpayers to write off the cost of capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax-deductible.
The super-deduction has a maximum amount of 130%. A business can deduct capital allowances where they would normally be required to ‘add back’ any depreciation. If a company paying corporation tax with accounting profits of £1,000, depreciation expense of £200 and total capital allowance claims of £300, they would make the following adjustment:
There are two main types of capital allowance. These are Writing Down Allowances (WDAs) for plant & machinery, covering most capital equipment used in a trade; and Structures and Buildings Allowances (SBA), covering the construction and renovation of non-residential structures and buildings.
Plant and machinery are assets used by a business that will help to carry on the business. It does not include any stock in trade, any part of the business or the business itself.
Some of these assets may qualify for the super-deduction or the 50% FYA, including but not limited to the following:
• solar panels
• computer equipment and servers
• tractors, lorries, vans
• ladders, drills, cranes
• office chairs and desks,
• electric vehicle charge points
• refrigeration units
• foundry equipment.
Where an accounting period straddles 1 April 2023 the main rate of corporation tax will be between 19% and 25%. The exact rate of corporation tax will be determined on a pro-rata day-count basis. In such a case, the super-deduction is available at a reduced rate on expenditure up to 31 March 2023.
Let’s take a look at some examples of super-deduction in some real-life scenarios.
If a company incurring £1m of qualifying expenditure decides to claim the super-deduction, spending it on qualifying investments will mean the company can deduct £1.3m (130% of the investment) in computing its taxable profits.
Deducting £1.3m from taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill.
A business in its accounting period ending on 30 June 2023 spends £40,000 on general pool P&M in January 2023.
The super-deduction is available for the period from 1 July 2022 to 31 March 2023 (i.e. 274 days). The percentage of super-deduction is calculated as [((274/365) x 30)+1] = 122.52%.
If plant and machinery go into a capital allowances pool the record-keeping for the purchaser is minimised. Any subsequent sale proceeds are deducted from the pool.
This is not the case with super-deduction expenditure, however. All disposal proceeds must be separately recorded as a balancing charge instead of coming off the capital allowances pool.
This also applies to ‘special rate pool’ expenditure. Companies will be able to claim a 50% first-year allowance from 1 April 2021 to 31 March 2023.
Without any further rules, it would be possible for a company to buy P&M in its year ending 31 March 22, claim 130% tax relief then sell it in the next period with a balancing charge equal to the sale proceeds.
The tax rate is the same in each case at 19% and this would give a ‘free’ tax break to the company.
The Finance Bill legislation states that there must be an appropriate adjustment made to the sale proceeds where the disposal of super-deduction expenditure occurs in an accounting period beginning before 1 April 2023.
For the year ending 31 March 2023, the balancing charge would be 130% of sale proceeds, while for the year ending 30 June 2023, it would be 122.52%.
Download our 2021/22 Tax Year Overview