Practical guide: a guide to the new super-deduction

Overview

The super-deduction is intended to encourage companies to invest in plant and machinery in the two-year period from 1 April 2021 to 31 March 2023. Unincorporated businesses cannot use it, but companies can potentially claim:

• an allowance of 130% on most new plant and machinery that would otherwise qualify for 18% main rate writing down allowances; or
• a first-year allowance of 50% on most new plant and machinery that would normally qualify for the 6% special rate writing down allowance (WDA).

The effect of the first allowance is that tax relief will be obtained at 24.7% on qualifying expenditure, i.e. 130% x 19%.

The super-deduction end date coincides with the date the main rate of corporation tax (CT) will rise to 25%. Following that date, the annual investment allowance (AIA) will give relief at 25% for qualifying expenditure. However, owners should keep in mind that the AIA is restricted. It is set to fall to just £200,000 from 1 January 2022. HMRC has published a factsheet.

Qualifying for the 130% deduction

To qualify for the super-deduction, as well as being a company,  the expenditure must:

• be on unused plant or machinery (second-hand purchases will not qualify);
• not be within the general exclusions in s.46 Capital Allowances Act 2001 (CAA) , e.g. cars or plant and machinery for leasing; and
• not be special rate expenditure under s.104A CAA (though the 50% deduction may apply).

There is no upper limit to expenditure that can qualify for the super-deduction. If companies anticipate that they will incur significant capital expenditure over the next five to ten years,  bringing this forward to fall within the two-year super-deduction period could see considerable savings.

Example. A companyhas a year end of 31 March and is planning to spend £3 million on new plant and machinery to help with a planned manufacturing expansion. Currently, this is scheduled for late 2023, meaning that the AIA deduction will be restricted to £200,000, with the remaining £2.8 million being pooled and subject to WDAs - so total tax relief of £176,000 in the year to 31 March 2024. However, by ensuring the expenditure is incurred in the year to 31 March 2023 it can all qualify for the 130% deduction, meaning a tax saving of £741,000.

It’s not just tax relief that may make accelerating expenditure worthwhile. The expenditure may increase trading income, which will then be taxed at 19% until April 2023.

Unincorporated businesses could consider incorporating ahead of incurring expenditure to take advantage of the super-deduction. There are other consequences of this though, for example the increased rate of CT from April 2023, and the requirement to formally extract profits from the company, e.g. by using salary and dividends.

Periods straddling 31 March 2023

The super-deduction will end on 31 March 2023. For accounting periods straddling that date, the normal 130% rate is tapered down to 100%. For example, expenditure during an accounting year ending 31 December 2023 would qualify for a super-deduction at 107.4% (calculated as (30 x 90/365 days) + 100).

The expenditure has to be incurred by 31 March 2023 to qualify. For example, a company with a year end of 31 December 2023 won’t be able to incur £1 million of expenditure on 1 April 2023 and claim a deduction at 107.4%.

Practical issues

As the super-deduction relieves all the expenditure upfront, pooling will not apply to expenditure subject to a claim. This can cause some unexpected problems later on. A balancing charge will arise on a disposal unlike assets relieved by the AIA, where a disposal may be absorbed by the main rate pool.

This will require accurate asset record keeping. The balancing charge may also be enhanced by 130% if it is sold before the end of the super-deduction period.

Case study illustration

Suppose that Acom Ltd prepares accounts to 31 March each year. In the year to 31 March 2022 it buys plant and machinery that would qualify for WDAs at 18% as main pool expenditure. The cost is £500,000 and we’ll assume the asset is sold for £200,000 in 2026/27. The directors are keen to take advantage of the super-deduction so the potential CT reduction for this year will be 19% x (130% x £500,000) = £123,500.

However, when the asset is sold there will be a balancing charge of £200,000 meaning additional tax of £50,000 at 25%. The net relief is therefore £73,500.

If the asset had been sold before 31 March 2023, the additional tax would be 19% x (£200,000 x 130%) = £49,400, i.e. a similar amount.

This is a better result than claiming the AIA, as the net relief will be £45,000 over the five years assuming there are no other assets with a written down value. However, in reality it is likely that Acom will have other assets in its main pool that would increase the value of an AIA claim. In fact, if the main pool has a value of at least £200,000, there would be no increase in CT due to the sale, meaning the overall tax saving is £95,000 by opting for the AIA route - £21,500 better than using the super-deduction.

This would have a knock-on effect on WDAs going forward but is a cash-flow advantage. Owners will need to consider the likely value of the main rate pool to make the best decision, and will need to be realistic as to whether (and when) the asset is likely to be sold in the future.

Nature of assets

The possibility for assets to qualify as “short-life” assets shouldn't be overlooked. The AIA can only be claimed in the period the expenditure is incurred. However, the first claim for WDAs in respect of short-life assets can be deferred.

The nature of the asset may also be relevant when considering whether to claim using the super-deduction. Some, e.g. ambience producing assets such as paintings used by businesses where these are allowable as plant, may depreciate by relatively little if at all over their period of ownership. If these had cost £500,000 and produced a tax deduction of £123,500 as above but were sold a few years later for £400,000, the balancing charge would be about £100,000 whether before or after 1 April 2023. Also, unlike the AIA, the super-deduction does not apply to assets used for leasing.

Loss relief

Budget 2021 also included an announcement that for company accounting periods ending between 1 April 2020 and 31 March 2022 losses can be carried back for three years rather than one. This is subject to conditions and limits, but if the super-deduction created or enhanced a loss the effect of a carry back claim should also be taken into account. However, the effect of the detailed rules and limits on loss relief use must be reviewed.