A new 130% first-year capital allowance for qualifying plant and machinery assets; and a 50% first-year allowance for qualifying special rate assets.
For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments. Under the super-deduction, for every pound a company invests, their taxes are cut by up to 25p. This change makes the UK’s capital allowance regime more internationally competitive, lifting the net present value of the UK's plant and machinery allowances from 30th in the OECD to 1st.
On March 9 Rishi Sunak announced to Parliament that he believed his super-deduction corporation tax relief will not only bring forward business spending for two years but “will increase the amount of investment as well”. At its peak, the super-deduction will raise the level of business investment by 10 per cent, or roughly £20bn a year, according to the Office for Budget Responsibility (OBR). Nigel May, partner at MHA MacIntyre Hudson, said: “Companies looking to use this relief will need to take care when the assets that the expenditure relates to are sold: tax charges may then arise clawing back the relief. It is perhaps worth noting that certain expenditure is excluded, in particular the acquisition of company cars.”
Why is the government introducing a super-deduction? Since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and in Q3 2020. The government tells us more generous capital allowances will help to stimulate business investment. As a result, these measures can help to promote economic growth and counter business cycles. The super-deduction could give companies a strong incentive to make additional investments, and aims to bring planned investments forward. A tax information and impact note for the policy, and draft legislation, is published here.
Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax deductible. Businesses deduct capital allowances when computing their taxable profits. In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation, but can instead deduct capital allowances. For example, a corporation tax paying company with accounting profits of £10,000, depreciation expense of £2000 and total capital allowance claims of £3000 would make the following adjustment: Add £2000 (depreciation expense) to £10,000 (accounting profits) = £12,000. Deduct £3000 (capital allowances) from £12,000 = £9000 (taxable profits). Apply the appropriate tax rate, e.g. corporation tax at 19%: £9000 x 19% = £1710 tax due.
The two main types of capital allowances being introduced are: Writing Down Allowances (WDAs) for plant & machinery - covering most capital equipment used in a trade; and Structures and Buildings Allowances (SBA) - covering the construction and renovation of non-residential structures and buildings. The 130% super-deduction and 50% first-year allowance are generous brand new capital allowances for investments in plant and machinery assets. Both will allow investing companies to lower their corporation tax bills.
To give an example of a company claiming the super-deduction. If the company has incurred spending of £10,000 of qualifying expenditure. This will mean the company can deduct £13,000 (130% of the initial investment) in computing its taxable profits. Deducting £13,000 from taxable profits will save the company up to 19% of that – or £2470 – on its corporation tax bill.
Most tangible capital assets used in the course of a business are considered plant & machinery when claiming capital allowances.
There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for either the super-deduction or the 50% First Year Allowance include, but are not limited to:
For more detail on the eligibility of different types of investments please check the GOV website.
A big change from the parallel Annual Investment Allowance is the exclusion of used equipment from the super-deduction. Meaning only new vehicles and machinery can qualify for the Super Reduction.
Simon Goldie, director of business finance at the F&LA, said: “There has been some confusion over the application of the super-deduction. In layperson’s terms, it benefits businesses whether they acquire equipment using cash or a hire purchase agreement."
“In the case of the latter, the legislation requires the person benefiting from the super-deduction to have ‘incurred the expenditure’ in acquiring the equipment, and as far as we understand it, this expenditure can include payments made under a hire purchase contract.” In the case of hired equipment you must be paying a periodical sum and in return plant and machinery assets are “bailed” (hired) to you. You must eventually end up owning those assets (such as by exercising an option to purchase or paying a fee). And finally it is also required that whomever hires/receives the goods is the one incurring the expenditure (i.e. paying for the contract). This makes sure that the benefit of the deduction goes to the small business rather than the lender.
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