The super-deduction will be an enhanced capital allowance that provides a new temporary first year allowance on certain qualifying expenditure. Unlike with the existing Annual Investment Allowance (which is restricted to £1m of spend within a Group) there is no spending cap/threshold with the super deduction so this could prove very valuable for companies with significant capital expenditure plans in the short to medium-term. I have summarised the reliefs as follows:
|Main Pool – Plant & Machinery||Special Rate Pool|
|Date claim effective from||Qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023, BUT excludes contracts entered into prior to 3 March 2021. With the 31 December 2023 accounting period, the super-deduction will be pro-rated based on the number of days in the accounting period that pre-date 31 March 2023.||Qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023, BUT excludes contracts entered into prior to 3 March 2021. With the 31 December 2023 accounting period, the super-deduction will be pro-rated based on the number of days in the accounting period that pre-date 31 March 2023.|
|Rate of relief||A first year allowance equivalent to 130% of the qualifying expenditure||A first year allowance equivalent to 50% of the qualifying expenditure The Annual Investment Allowance can be used to offset against the 50% that cannot be claimed via the super-deduction Tax relief provided on the remaining cost on a reducing balance basis at an annual rate of 6%.|
|Qualifying expenditure||New and unused plant and machinery that typically qualifies for main pool capital allowances such as machinery, equipment, sanitary fittings, telecommunications systems including a range of other installations.||New and unused plant and machinery / integral features that typically qualify as a special rate items such as electrical wiring, air conditioning installations, cold water system and other installations.|
Other points to note
Where an asset is disposed of, on which capital allowances were previously claimed, there will be a claw back of the capital allowances based on the proceeds received at the date of disposal. Where expenditure has been incurred on an asset and capital allowances are claimed under the super-deduction, there can be a claw back of the enhanced deduction where the asset is sold in an accounting period that commences prior to 31 March 2023.
What does the introduction of Super-deduction capital allowances mean for you and your business?
The introduction of the super-deduction capital allowances also coincides with the temporary extension to carry back trading losses. The expansion of these rules will allow companies that generate a trading loss, in an accounting period ending between 1 April 2020 and 31 March 2022, to carry back losses of up to a total of £2m (shared between group companies) against the three previous accounting periods on which corporation tax would have been charged at a rate of 19%. The £2m will be an annual limit and will be shared with the rest of the wider group.
So it’s worth bearing in mind that the 130% super deduction, combined with the current corporation tax of 19%, means that for every £100,000 you spend, you effectively get £24,700 back in corporation tax reductions or tax relief from carrying losses back and this can be an immediate benefit.
The government has also announced that the main rate of corporation tax will be increasing to 25% which will take effect from 1 April 2023. Therefore, it is possible to plan capital expenditure in a way that generates a super deduction that results in trading losses for pre-April 2023 periods that could be carried forward into future periods where the tax rate is higher and this could increase the value of the tax saving from £24,700 to £32,500 per £100,000 of spending.
Once the superdeduction ceases and the tax rate increases to 25% £100,000 expenditure will result in a tax reduction equalling £25,000 (although that tax benefit will potentially be spread over a longer period of time depending on the level of annual investment allowance at the time).
In summary, if you are considering capital expenditure in the next few years it is worth considering accelerating this expenditure to take advantage of the super-deduction and we can assist you in evaluating the potential benefits.