What is the super deduction?
On 3 March 2021, the Chancellor announced a temporary change to tax relief which allows companies to claim enhanced capital allowances on qualifying plant and machinery assets. This new relief will allow companies to save up to 24.7p in corporation tax for every £1 of investment in plant and machinery in the year of expenditure.
The tax relief is available on qualifying expenditures incurred from 1 April 2021 up to and including 31 March 2023. Any contracts entered into before 3 March 2021 will not be eligible for super deduction regardless if expenditures are incurred post 31 March 2021. Whilst the existing rules regarding the timing of expenditures for capital allowances purposes have not changed, companies will need to consider the timing of expenditure carefully in order to determine whether they will qualify.
Subject to some exclusions, the enhanced relief is given by way of a First Year Allowance (“FYA”) at the relevant percentage for the asset type. The percentages are as follows:-
|Percentage of FYA||Known as||What assets qualify||Examples of such asset|
|130%||“Super deduction”||Assets which qualify for plant and machinery allowances, ordinarily at 18%||Computer equipment, vans, office equipment|
|100%||Assets which qualify for plant and machinery allowances, used partly in a ring fence business and partly in another qualifying business||Computer equipment or machinery used for extracting oil & gas that are used in a ring fence business|
|50%||“Special rate allowance”||Assets which qualify for capital allowances at the lower rate of 6% (special rate assets)||Solar panels electrical and lighting systems, cold water systems, lifts|
*50% of the cost can be claimed as a First Year Allowance, with the remaining 50% of the cost attracting 6% Writing Down Allowances on a reducing balance basis.
The temporary measure has been designed to encourage capital investment in the UK.
What assets will not qualify for this tax relief?
Not all plant and machinery will qualify for this tax relief. The exclusions are set out in the following table:-
|Plant or machinery||130% super deduction||100% ring fence trade allowance||50% special rate allowance|
|Long life assets (>25 year life when new)||X||X||X|
|Plant or machinery acquired for leasing||X||X||X|
|Assets purchased where there is a change in the nature or conduct of the trade or business and the main purpose is to benefit from this tax relief||X||X||X|
|P&M used partly for a qualifying activity and partly for other purposes, or the re-use of assets previously used for long funding leasing, or gifted P&M||X||X||X|
|Special rate expenditure||X||X|
|Main plant or machinery||X|
|Plant or machinery intended wholly or partly for a ring fence trade||X|
Who is eligible to claim the enhanced capital allowances?
Companies which are within the charge to UK Corporation Tax are eligible to claim the enhanced capital allowances on qualifying plant and machinery assets.
Partnerships and unincorporated businesses will not be eligible to claim the new FYA rates however they are still entitled to claim the annual investment allowance.
How does this new enhanced deduction interact with the existing Annual Investment Allowance?
The annual investment allowance (“AIA”) will remain at £1m for the period from 1 January 2021 – 31 December 2021. There is no limit to expenditure to which the FYA for the period from 1 April 2021 to 31 March 2023 may apply.
The new enhanced deduction is in addition to the existing AIA therefore companies may be eligible to claim both the AIA and the new FYA. This can create an attractive cash advantage for many companies who are planning on investing in plant and machinery however careful consideration must be given to what tax relief to claim.
Companies who are planning on investing in plant and machinery of more than £1m in the next few years should consider taking advantage of the super deduction by bringing expenditure forward and incur the costs on or before 31 March 2023.
When the corporation tax rate of 25% applies from 1 April 2023, the tax deduction for expenditure qualifying for capital allowances will also be 25p for every £1 invested, but without the benefit of a first year allowance or such a generous AIA, it will be obtained over time and not in one year.
Examples of how this tax relief will work
A company purchases new equipment (a qualifying asset) on 30 June 2021 costing £5m.
|Tax relief under the “old” rules||Tax relief under the super deduction|
|Maximum AIA available||£1m||Super deduction claim (£5m@130%)||£6.5m|
|Writing down allowances (£4m@18%)||£0.72m|
|TOTAL Capital allowances in year 1||£1.72m||TOTAL Capital allowances in year 1||£6.5m|
|Tax saving at 19% in year 1||£0.33m||Tax saving at 19% in year 1||£1.24m|
As a result of the super deduction, a company can save c£910,000 in corporation tax in the year of purchase in this example.
A company purchases new solar panels (a special rate asset) on 30 June 2021 costing £5m
|Tax relief under the “old” rules||Tax relief under the special rate allowance|
|Maximum AIA available||£1m||Special Rate allowance (£5m@50%)||£2.5m|
|Writing down allowances (£4m@6%)||£0.24m||Maximum AIA available||£1m|
|TOTAL Capital allowances in year 1||£1.24m||TOTAL Capital allowances in year 1||£3.5m|
|Tax saving at 19% in year 1||£0.24m||Tax saving at 19% in year 1||£0.67m|
As a result of the special rate allowance, a company can save c£430,000 in corporation tax in the year of purchase in this example.
In both the examples, where no FYA is claimed there would be capital allowances available in future years.
Benefits of this tax relief
- Net tax benefit of 24.7%– for assets that qualify for the super deduction, taxable profits can be reduced by more than the cost of the assets. This results in a net tax saving of 24.7% on the cost of the asset
- Corporation tax repayment– due to the higher rates of relief, companies may end up with a loss for corporation tax purposes (as a result of higher capital allowances being claimed) which can be carried back (up to 3 years) generating a corporation tax repayment for earlier accounting periods
- Lower corporation tax liabilities (current and future) – corporation tax liabilities will be lower as a result of higher capital allowances being claimed. If a taxable loss is generated, this could be carried forward and offset against future taxable profits (potentially saving tax at 25% in future years).
Disposing of assets which qualify for the super deduction or special rate allowance
Super deduction and special rate allowance
For both the super deduction and special rate allowance it will be necessary to apportion the disposal proceeds between the part which qualified for the FYA and the part which did not.
Super deduction if asset disposed of in an accounting period ending before 1 April 2023 or beginning before 1 April 2023.
If an asset on which the super deduction was claimed is disposed of before 1 April 2023, special provisions will apply to determine the disposal value and consequent balancing charge. In order to calculate the taxable disposal value, the actual proceeds received (relating to the part of the asset for which the super deduction was claimed) must be multiplied by 1.3 (unless the accounting period straddles 1 April 2023, in which case the multiplying factor should be reduced accordingly based on the number of days pre/post 1 April 2023).
Anti-avoidance legislation can counteract the effect of the FYA claimed where arrangements are entered into with the main purpose of claiming the FYA was to obtain a tax advantage.
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