What is the super-deduction?
The super-deduction £25bn tax break, announced in HM Treasury’s 3rd March 2021 Budget, is intended to boost investment by providing 25p off company tax bills for every pound of qualifying spending on plant and machinery.
Rishi Sunak told Parliament on 9th March 2021 that he believed his super-deduction corporation tax relief will not only bring forward business spending for two years but “will increase the amount of investment as well”.
It is projected that the super-deduction will raise the level of business investment by 10%, or roughly £20bn a year, according to the Office for Budget Responsibility (OBR).
How does the super-deduction work?
The super-deduction offers 130% first-year relief on qualifying main rate plant and machinery investments from 1st April 2021 until 31st March 2023 for companies.
For most business equipment, there will be a super-deduction of 130% of the expenditure incurred. This will mean that on a spend of £100,000, the corporation tax deduction will be £130,000, giving corporation tax relief at 19% on £130,000, which is £24,700.
Normally such expenditure would either fall within a company’s annual investment allowance and produce relief of only £19,000 or alternatively be tax-relieved at 18% of the cost per annum.
For a company with an accounting year to 31st March, the super-deduction calculation is straightforward. That’s also the case for any other year-end providing the year-end falls before 1st April 2023 – for example expenditure in the year to 31st December 2022.
Is there a limit to how much can be deducted?
There is no expenditure limit on either the 130% super deduction or the 50% first year allowances.
Example of super-deduction saving
A company incurring £2m of qualifying expenditure decides to claim the super-deduction.
As the company has spent £2m on qualifying expenditure it can deduct £2.6m (130% of the initial investment) in computing its taxable profits
The company will save £494,000 on its corporation tax bill (being £2.6m at 19%)
What equipment qualifies for the super-deduction?
The kind of assets that qualify for the super-deduction are described broadly as ‘plant and machinery’ and so includes but is not limited to:
- Materials handling equipment
- Production line machinery
- Robotic and non-robotic automated systems
- Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Foundry equipment
What doesn’t qualify for the super-deduction
There are some specific items that are specifically excluded and do not qualify for the super-deduction:
- Where expenditure is incurred in the chargeable period in which the qualifying activity is permanently discontinued
- Expenditure excluded from long life asset treatment by the ‘grandfathering provisions’
- Expenditure on the provision of plant and machinery for leasing. Note that the letting of a ship on charter or any other asset on hire is to be regarded as leasing for these purposes. HMRC have communicated to us that these exclusions will apply to landlords. Landlords, including property owning companies which lease property to other members of the same group, will not be able to benefit from the super-deduction or the 50% FYA. This does not prevent the landlord from claiming the annual investment allowance or writing down allowances where appropriate. This may lead to some group clients wanting to push expenditure down into the tenant company where historically it would sit in the landlord company.
- Claiming the super-deduction is incurred in connection with a change in the nature or conduct of a trade of business carried on by a person other than the person incurring the expenditure (only if claiming the super-deduction is one of the main benefits expected to arise from the change)
Does the super-deduction replace the Annual Investment Allowance (AIA?)
No, the AIA continues to exist alongside the new allowances. The limit of qualifying expenditure for AIA remains at £1m to 31st December 2021. Thereafter the AIA is expected to fall to only £200,000.
For expenditure over these limits writing down allowances of 18% or 6% are available. Expenditure on second-hand plant and machinery for instance can still benefit from AIA.
Care will need to be taken to consider the optimum capital allowances claim and impact of any potential clawback on sale.
Individuals and partnerships are entitled to 100% annual investment allowance (AIA) on qualifying expenditure.
How does the super-deduction impact on deferred tax?
With capital allowances being accelerated, this will lead to additional deferred tax being recognised by many companies.
The rate at which deferred tax will be recognised will increase, as the corporation tax rate is set to rise to 25% in April 2023.
Can I still claim the super-deduction if I use asset finance?
There seems to be some confusion here.
In the draft super-deduction legislation, plant and machinery investment incurred under “a hire purchase or similar contract” – common among small and medium-sized companies – will have to meet “additional conditions” to qualify for the super-deduction.
The implication is that the 130% tax break excludes hire purchase or asset finance arrangements because the super-deduction only applies to “the person to whom [the equipment] is bailed or hired is the person who incurs the expense”.
According to the Times, more than one in five small and medium-sized businesses use asset finance or hire purchase when purchasing equipment.
Julien Rose of regulatory consultancy Asset Finance Policy said: “This really needs clarifying before the rules are confirmed … hopefully it will soon be confirmed that relevant leasing will qualify, as it has before.”
However, according to the Finance & Leasing Association, these “additional conditions” are precisely there to ensure that the benefit of the super deduction go to the business customer rather than the lender, and that does not mean hire purchase cannot be used.
Is there any small print to the super-deduction?
There are some requirements to qualify, including the following main points:
- that you are paying a periodical sum and in return plant and machinery assets are “bailed” (hired) to you
- that eventually you can end up owning those assets (such as by exercising an option to purchase or paying a fee)
- that the person who hires/receives the goods is the one incurring the expenditure (i.e. paying for the contract). This makes sure that the benefit of the deduction goes to the small business rather than the lender.
Can I use the super-deduction for used or second-hand equipment?
In a word, no. A big change from the parallel Annual Investment Allowance is the exclusion of used equipment from the super-deduction.
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