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Spotlight On…Super-Deduction Capital Allowances

In the latest edition of out ‘Spotlight On…’ series, Genevieve Morris discusses a new “super-deduction” and how the relief will be operated.

During the Budget on 3 March, Rishi Sunak announced a new “super-deduction” for capital expenditure incurred by companies from 1 April 2021 to 31 March 2023. A headline-grabber with the devil in the detail, it’s essential that business owners understand how the relief will be operated.

The Chancellor’s big give-a-way, before increasing Corporation Tax rates to 25% in April 2023, is the super-deduction, or at least that’s what it looks like on the tin. It is a measure to encourage accelerated spending by companies to help kick-start the economy, by providing generous tax relief for expenditure incurred from 1 April 2021 to 31 March 2023.

This is relevant for all companies that spend money on items that qualify for capital allowances and particularly relevant for companies that have large capital spend planned over the next few years.

What do you need to know?

The 130% capital allowance applies to expenditure incurred after 1 April 2021, but importantly it does not apply where contracts were entered in to 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.

This includes desks, chairs, computers, and a wide range of other assets, but generally not buildings or items fixed in buildings.

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 December 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 for the next two years, the super-deduction will be welcome. A capital investment of £100,000 would be worth a tax saving of £24,700.

Loss-making businesses could also potentially benefit if they can take advantage of the extended loss carry back rules also announced by the Chancellor on 3 March.

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, particularly if your expenditure exceeds the Annual Investment Allowance (AIA), for many businesses their annual expenditure will fall within the AIA. The AIA is currently an allowance of 100% on expenditure up to £1m.

For these businesses where their expenditure would be covered by the AIA, and providing of course the AIA continues to be available beyond the end of 2022, once corporate tax rates increase to 25% in April 2023, the same example above will be worth a £25,000 tax saving.

By providing this generous tax relief, the Chancellor intends to spark an intense period of accelerating investment and spending; it’s really just a timing difference for the Chancellor though, as demonstrated above.

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.