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Spotlight On…Super-Deduction Capital Allowances

In the latest edition of our ‘Spotlight On…’ series, Genevieve Morris discusses the 'Super-Deduction' and why companies looking at capital intensive projects may look to defer expenditure until after April 2023.

Why is it relevant?

During the 2021 Budget, ex-Chancellor Rishi Sunak announced a new ‘Super-Deduction’ for capital expenditure incurred by companies from 1 April 2021 to 31 March 2023.

This was the ex-Chancellor’s “big giveaway” designed to encourage accelerated spending by companies to help kick-start the economy, rather than companies deferring large capital projects until Corporation Tax increased to 25%.

For a few weeks it looked like this was going to be a super giveaway, when ex-Chancellor Kwasi Kwarteng proposed to scrap the 25% tax hike. The joy was short lived however, when new Chancellor Jeremy Hunt restored the proposed tax increase.

We now have (almost) complete certainty that Corporation Tax rate will increase to at least 25% on 1 April 2023, and this is why some companies that have planned capital spend may be looking to defer commencement of projects until after April next year.

Who does it affect?

This is relevant for all companies that spend money on items that qualify for capital allowances, but particularly relevant for companies where capital spend is forecast to fall within the £1m annual investment allowance (AIA).

What do you need to know?

The 130% capital allowance applies to expenditure incurred after 1 April 2021, although it does not apply where contracts were entered into before 3 March 2021 (even if the expenditure under that contract occurs after 1 April 2021).

It applies to expenditure which would qualify for plant and machinery allowances. This includes desks, chairs, computers, and a wide range of other assets, but generally not buildings or items fixed in buildings. The super-deduction cannot be claimed on second-hand items.

It will be important to carefully track the expenditure where these allowances are claimed, as any disposal proceeds received in the future will be taxed in full as a balancing charge.

Further, if any items are disposed of before 1 April 2023 and the 130% allowance has been claimed, the proceeds will be multiplied by 1.3% when calculating the balancing charge. A scaled multiplication factor then applies to disposals which take place in an accounting period which straddles 1 April 2023.

For expenditure that does not qualify for the main super-deduction, but would qualify for special rate allowances such as water systems and lighting, an accelerated deduction of 50% is available from 1 April 2021 to 31 March 2023.

Again, when these assets are disposed of at a later date, 50% of the proceeds will be treated as a taxable balancing charge.

While the headline news is that the 130% Super-Deduction will apply to expenditure incurred between 1 April 2021 and 31 March 2023, clients should be aware that where they incur expenditure in an accounting period which ends after 1 April 2023, the 130% is reduced proportionally depending on the number of days in the period that arises after 31 March 2023. So, for a company with a 31 December 2023 year end, expenditure incurred in January to March 2023 will qualify for a 107% allowance.

What should you do next?

If you have planned capital expenditure in the near future, the super-deduction on capital investment of £100,000 would be worth a tax saving of £24,700.

Business owners should pause, however, before accelerating major projects that were planned beyond April 2023.

While there are merits in accelerating expenditure into the super-deduction periods, if your expenditure exceeds the Annual Investment Allowance (AIA), for many businesses their annual expenditure will fall within the AIA.

One Kwasi Kwarteng giveaway, which hasn’t yet been ‘U-turned’, was making the AIA, which was due to decrease to £200k pa from 1 April 2023, permanently set at £1m.

While we can’t guarantee the permanence of any “permanent” measures announced, for businesses where their expenditure would be covered by the AIA, once Corporation Tax rates increase to 25% in April 2023, capital investment of £100,000 will be worth a £25,000 tax saving. Moreover, any proceeds on its future disposal will be deducted from the pool of allowances rather than crystalising a balancing charge.

Would you like to know more?

If you would like to discuss the above matter or would like to discuss your Corporation Tax compliance more generally, please get in touch with your usual Blick Rothenberg contact or Genevieve Morris whose details you can find on this page.

Contact Genevieve

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