The Chancellor’s Budget Day saw the announcement of a new capital allowance that will allow companies to reduce their taxable profits by 130% of the cost of new equipment. This has attracted a lot of interest but also raised a number of questions.
The Super Deduction
Very simply, the Super Deduction is a new temporary allowance that gives a greater and faster level of tax relief on qualifying expenditure incurred between April 1, 2021 and March 31, 2023. For most expenditure on plant and machinery, Will Silsby, a technical officer with the Association of Taxation Technicians, says that it works by treating the company as if it had spent an extra 30% on the item and then allowing tax relief on the whole of that uplifted amount in calculating the tax bill for the year of expenditure. ‘So,’ he says, ‘with a 19% tax rate, the Super Deduction is designed to reduce a company’s tax bill by some 24.7% of the actual cost of the qualifying items.’
But the allowance is only available to those subject to corporation tax and it is not available to a company ceasing activity.
The Super Deduction only applies to items that are treated for tax purposes as plant and machinery. For many businesses, Silsby says that ‘this is likely to cover most of their expenditure and simple examples include anything from a laptop to a double-decker bus. In contrast, a building or structure, or something intangible cannot be plant or machinery and is not eligible.’
He also makes clear that a special provision in the legislation means that ‘any expenditure incurred as a result of a contract that was entered before March 3, 2021 will be ineligible as the expenditure is treated as made before April 1, 2021 regardless of when payment was required.’
Further, some items are specifically excluded from eligibility, including cars, used and second-hand assets, and plant or machinery that is leased out to another.
Practical effects of the Super Deduction
Before delving into the effects of the Super Deduction, Silsby notes that all businesses are already entitled to an Annual Investment Allowance (AIA), which enables them to get tax relief on the whole of their qualifying expenditure for the year of purchase, up to an annual limit.
‘Until December 31, 2021,’ he says, ‘the AIA limit is £1m, but is scheduled to reduce to £200,000 from January 1, 2022.’ He explains that ‘the higher limit means that a company spending £500,000 before April 1, 2021 on plant or machinery will (without the Super Deduction) get a tax reduction at 19% on that amount – so £95,000. If that same level of expenditure was incurred after March 31, 2021 and qualified for the Super Deduction, the tax reduction would instead be £500,000 x 130%, which, at 19%, gives a tax reduction of £123,500 – £28,500 more.’
At higher levels of qualifying expenditure, the Super Deduction creates a disproportionately greater benefit.
A separate Special Rate
As already noted, some items of plant and machinery are not eligible for the Super Deduction. This includes anything treated as ‘special rate’ assets which Silsby notes involves integral features of a building, long life assets, thermal insulation and solar panels.
He says that ‘under the general capital allowance legislation, the annual Writing Down Allowance on these items of plant or machinery is just 6% rather than the normal 18% meaning that these ‘special rate’ assets are written off more slowly for tax purposes.’
But, says Silsby: ‘If a company incurs qualifying expenditure on these types of asset in the two-year period starting on April 1, 2021, they cannot qualify for the 30% value boost explained above.’ However, he says that companies in this situation will be, provided that the particular assets are not specifically disqualified, entitled to new Special Rate Allowance – this ‘provides tax relief for the year of expenditure on 50% of the actual cost instead of just 6%. Unlike the Super Deduction, this does not increase the value of tax relief over the life of the asset, but it does significantly accelerate the relief.’
Tax losses
Lastly, there is the matter of companies making losses. On this, Silsby says they can normally carry back losses from one accounting period to the previous accounting period so the profits of that previous period are reduced. ‘This,’ he says, ‘enables a repayment of corporation tax for the previous period. But because of the pandemic, the Chancellor announced that losses arising in a company’s accounting period that ended between April 1, 2020 and March 31, 2022 can be carried back for two further years.’
He adds, though: ‘It is important to consider the alternative of carrying the loss forward, particularly if that might result in tax relief at 25% instead of 19%.’
Summary
With the complexities set down, it is not hard to see why a company may wish to take appropriate professional advice in advance to ensure the Super Deduction or the Special Rate Allowance works as expected.