We mentioned the new capital allowances “Super-deduction” briefly in our last Budget update but we thought it was worthwhile considering the benefits of this new relief in more detail. The allowance, which applies for the period 1 April 2021 to 1 April 2023, could be a really valuable new source of relief for some types of business. In fact, the new deduction will allow profitable companies which own plant and machinery to cut their tax bill by up to 25p for every £1 they invest!
For those of you who are unfamiliar with plant and machinery capital allowances, perhaps because your business does not own these types of assets, these are allowances which give tax relief in advance of their commercial depreciation. They take the place of certain types of accounting depreciation, which are not normally tax deductible. You may hear the Super-deduction being referred to as an “enhanced” first-year allowance because it provides a benefit which actually exceeds the cost of the asset in the first year.
Despite its name there are actually two types of additional reliefs:
- the “super-deduction” itself, being a 130% allowance on new plant or machinery that is not special rate expenditure, i.e. it would ordinarily qualify for the 18% main rate writing down allowance; and
- a “special rate allowance” which is a first-year allowance of 50% on new plant or machinery that qualifies as special rate expenditure. This type of expenditure would ordinarily qualify for the 6% rate writing down allowance.
Amongst other things, the introduction of the relief means that it is critical for affected businesses to maintain proper records of dates of acquisition or disposal especially for larger projects that span the period from 1 April 2021 and 1 April 2023. This is partly because, as with other allowances, where assets are disposed of, on which either of these reliefs were claimed, there will be a balancing charge to calculate.
The Government claims that these changes make the UK’s capital allowance regime much more internationally competitive:
“lifting the net present value of our plant and machinery allowances from 30th in the OECD to 1st”.
This is a big claim – the OECD has 38 members representing the majority of the world’s economies. However, you should note that Brazil, China, India, Indonesia, and South Africa are only “key partners” and not full members and some of these do have some form of special writing down allowances for certain assets.
Unfortunately for some this relief is only available for companies within the charge to corporation tax and not for self-employed businesses or partnerships and does not apply to used or second-hand assets.
Where the super deduction applies the Annual Investment Allowance (AIA) will not apply (since the rate of the AIA (100% on the first £1m of expenditure until 31 December 2021) is lower than that of the Super-deduction. If you are interested in knowing more about the AIA please click on this link to our previous blog on the topic.
The expenditure has to be incurred on or after 1 April 2021 and the rate of the Super-deduction will require apportioning if an accounting period straddles 1 April 2023. Where a contract has been entered into before 3 March 2021 (the day of Budget 2021) the expenditure is treated as being incurred on the date the contract was entered into and the exceptions for unconditional contracts do not apply. There are special rules for hire purchase contracts.
Of course, the value of the new relief will depend on a number of factors including the nature of the business, its asset profile and how long assets are expected to be held for, particularly if they are to be sold at a later date.
Finally, there are some rules which will deny the relief when the arrangements are contrived, abnormal or lacking a genuine commercial purpose, or they are intended to circumvent the limits of the relief but these should not apply in normal commercial circumstances.
So that’s it. Are you missing out on a valuable opportunity? Let us know whether you want to understand more about how the relief might help your business thrive.