The Super Deduction may not be so super after all. Cassandra Graham, Senior Tax Manager at Bates Weston has been taking a look at the super deduction capital allowance, and identifies a number of key issues to be aware of when considering its use.

As announced in this year’s budget, from 1 April 2021 to 31 March 2023, a “super deduction” of 130% will be available to companies incurring expenditure on qualifying plant and machinery in the form of a special First Year Allowance (FYA). There is also a 50% FYA for expenditure on new integral features such as air conditioning, electrical and lighting systems.

Practically this will mean that for every £1 spent on qualifying plant on which the super deduction is claimed, a company will save 24.7p in the year the assets are bought. For every £1 spent on special rate items the company will save 9.5p in the year of expenditure.

Additionally, the 100% Annual Investment Allowance (AIA) remains in place and can be used to relieve expenditure qualifying for capital allowances but not qualifying for the super deduction and FYAs above e.g., second hand plant and machinery. The AIA limit of £1m has been extended until 31 December 2021 but it will decrease to £200,000 from 1 January 2022, making accelerating capital expenditure of this type worthwhile.

There are a number of key points to note about the super deduction and 50% FYAs which are why many tax advisors are terming it the ‘not so super’ deduction: –

  1. Companies Only – The relief is only available to companies, largely to incentivise capital expenditure prior to the increase of the main rate of corporation tax to 25% from April 2023. Sole traders and partnerships will not benefit from these provisions.
  2. Only Certain Assets Qualify – The relief is only available for the purchase of new and unused assets and as a FYA there are certain types of expenditure excluded including expenditure on cars (including electric cars), assets leased out in the course of a letting business (including plant provided in buildings by commercial property landlords which includes holding company landlords) and long-life assets.
  3. Qualifying Assets are not ‘Pooled’ for Capital Allowance Purposes – the assets on which the super deduction and 50% FYAs are claimed are not linked or added to the capital allowance pools. Companies will therefore need to keep detailed records of individual assets so that they can be separately identified on a disposal.
  4. Clawback on Disposal – There is a potential sting in the tail. An immediate tax charge of 130% on the disposal value of a super deduction asset and 50% of the disposal value of 50% FYA assets, will increase taxable profits in the year of disposal which will likely be taxed at 25% if disposed of on or after April 2023.

There are further complications in relation to the provisions including restrictions for contracts entered into prior to Budget day, broad anti-avoidance measures to attack any arrangements contrived to take advantage of the provisions and complex transitional provisions.

One thing is clear. Capital allowances have become a lot more complex and the super deduction may not always be the best answer!

Talk to us about your making your capital expenditure plans tax effective.