The super-deduction is a £25 billion tax break that is intended to spur business investment, aid post-pandemic economic recovery and give a boost to the UK's productivity levels. It was announced by Chancellor Rishi Sunak in this year's Budget as 130% first-year relief on assets. The super-deduction is described by some as the largest tax cut in UK history and by the Chancellor himself as 'bold and unprecedented'.
For two years from April 2021, companies' investments in plant and machinery will qualify for a 130% capital allowance deduction, providing 25p off company tax bills for every £1 of qualifying spending on plant and machinery.
Here we take a look at the super-deduction: what are the terms and conditions? How does it sit alongside the usual rules on capital allowances, and are there any pitfalls?
Who is eligible for the super-deduction?
It is important to note that the super-deduction is not available to every business. It is targeted at companies, not unincorporated businesses. These will have to continue to look to the Annual Investment Allowance (AIA), with its temporarily extended higher £1 million limit, for major capital spending up to 31 December 2021.
How does it work?
It works by giving first-year tax relief in the form of capital allowances for expenditure incurred between 1 April 2021 and 31 March 2023. For assets that would normally qualify for 18% main rate writing down allowances, the super-deduction gives first-year relief of 130%. Assets normally qualifying for 6% special rate writing down allowances (such as integral features in buildings, like lifts and long-life assets) can qualify for a first-year allowance of 50%. But this 50% allowance is likely to be relevant only to companies that have used their AIA. Unlike the AIA, there is no cap on eligible expenditure. The rate of the deduction will be apportioned for a business making eligible expenditure in an accounting period straddling 1 April 2023.
What are the exclusions?
Plant or machinery must be new, not used or second hand. Expenditure incurred on contracts entered into before the Budget on 3 March 2021 does not qualify. The general exclusions that are in existing legislation relating to first-year allowances apply. For example, expenditure on cars and assets for leasing are excluded – the latter point meaning that commercial landlords may benefit less than the initial publicity of the proposals might have led them to expect.
Assets purchased with a view to leasing to third parties do not qualify for the new super-deduction or special rate first-year allowance for capital allowances purposes.
Leased assets make up a significant proportion of plant and machinery used in trading activities and their exclusion would reduce the impact that these temporary allowances have on incentivising commercial investment and growth.
The Construction Plant Hire Association estimates that the UK's plant hire industry is worth £4 billion per annum. Meanwhile, the Construction Equipment Association estimates that between 60% and 65% of all construction equipment sold in the UK goes into plant hire.
However, at a time when some businesses can ill-afford to make large capital expenditures, leasing or short-term hire are particularly attractive routes to acquiring newer and more productive plant and machinery. For others, these options make good business sense because the assets will only be used for limited periods or need to be updated regularly.
Good record-keeping is essential
Rules on what happens when the assets are disposed of make the picture more complex. Disposal proceeds will be treated as a taxable balancing charge. So, companies that dispose of the assets before the end of the regime could find that it ends up costing more in tax than the super-deduction originally saved them. It will be important to keep records of assets on which the super-deduction is claimed so they can be correctly treated on sale.
Whether the super-deduction significantly benefits your company will depend on the forecast level of capital expenditure, the type of asset, financing method and your expected corporation tax rate.
This is complex area, and the right decision for your business will be unique to your firm. Please contact us for further advice.