Is it a bird? Is it a plane? No, it’s the Super Deduction! doesn’t really have the same ring to it does it?
But for those of us working in tax, the new Super Deduction is the area we’ve had more questions on than any other since the announcement by the Chancellor of an enhanced capital allowances regime which would allow either a 130% deduction on plant and machinery purchased for the main pool or a 50% deduction for plant and machinery in the special rate pool.
As with all good tax legislation, the devil is in the detail and following the publication of the draft legislation we’re able to answer:
- Who qualifies?
- What expenditure qualifies?
- How does timing of expenditure work?
- How does the new Super Deduction interact with the existing Annual Investment Allowance?
- How are disposal proceeds dealt with?
Let’s take them in order…
We expected anyone in business, regardless of being a sole trader, partnership or company to qualify.
However, the legislation specifically states that to qualify, expenditure must be incurred by a company within the charge to Corporation Tax.
Therefore, only companies will qualify for the new relief.
What expenditure qualifies?
Firstly, expenditure has to be on new and unused plant and machinery and therefore expenditure on second-hand equipment will not qualify.
Assets qualifying for the 130% deduction, or “Super-Deduction Expenditure” are plant and machinery that would have normally qualified in the main pool such as:
- Computer Equipment
- Commercial Vehicles (Vans/Lorries etc.)
Assets qualifying for the 50% deduction, or “SR Allowance Expenditure” are plant and machinery that would have normally qualified in the special rate pool such as:
- Air-conditioning and air-cooling systems
- Hot and cold-water systems
- Electrical systems, including lighting systems
- External solar shading
- Lifts, escalators and moving walkways
- Space and water heating systems
- Thermal insulation of buildings
And then the big question… what about cars? Unfortunately, as may have been expected cars do not qualify for this relief as they are specifically excluded.
As a reminder, from 1st April 2021 cars with CO2 emissions of 0g/km (50g/km up to 31 March 2021) will still receive a 100% first-year allowance, up to 50g/km 18% writing down allowances and above this rate, 6% writing down allowances.
Businesses may also wish to reconsider their capitalisation policy, i.e. some businesses typically only capitalise items over a certain expense level in order to simplify the accounting. With the super deduction, it will now be beneficial to capitalise as much as possible in order to maximise the enhanced relief where accounting rules allow.
Businesses may also wish to consider whether there are staff costs that can be appropriately capitalised as part of the qualifying spend e.g. if staff time is spent on installing plant.
How does timing of expenditure work?
Expenditure needs to be incurred on or after 1 April 2021 but before 1 April 2023.
The expenditure is treated as incurred when an unconditional contract is entered into. Specifically, though, Mr Sunak announced that any contracts entered into before 3rd March 2021, regardless of when the unconditional obligation to pay arises, will not qualify for the new reliefs.
Hire purchase contracts continue to be qualifying expenditure on the basis the contract allows for the plant and machinery to become owned by the claimant on performance of the contract. Hire purchase assets do however have to be in use by the year-end to be treated as qualifying expenditure.
Clearly, any spend that was planned for March 2021 will be better, where possible delayed until after 1 April 2021.
How does the new Super Deduction interact with the existing Annual Investment Allowance (AIA)?
It was also confirmed that the extension to the £1m AIA which allows a 100% deduction on the expenditure noted above continues to 31 December 2021.
Therefore, in practice, rather than claiming the SR Allowance Expenditure deduction of 50%, it is likely businesses would continue to claim the AIA as this gives a 100% deduction, rather than 50%.
It would only be beneficial to claim the SR Allowance Expenditure deduction if you were to spend more than £1m on special rate pool additions (not including cars!), or on second-hand expenditure.
How are disposal proceeds dealt with?
Additional rules have been drafted on how proceeds are taxed for assets on which a Super Deduction Expenditure allowance (130%) has been claimed and depends on the date on which a disposal takes place.
If a disposal of these assets takes place in an accounting period that commences before 1 April 2023, the amount is determined as follows:
- Divide the number of days before 1 April 2023 by the total days in the accounting period
- Multiply that amount by 0.3, and
- Add 1 to the above result
Practically, this means that for periods ending on or before 31 March 2023, proceeds are taxed at 130% of the amount received, with periods straddling 1 April 2023 receiving a hybrid rate. For periods starting on or after 1 April 2023, proceeds remain taxable at 100% of the proceeds received.
Typically, on disposal of plant in the main pool, the proceeds received are simply deducted from the overall pool balance. As the pool balance is written down at 18% per annum, this effectively taxes the proceeds over several years.
However, under the new regime, proceeds received are taxed when received and therefore taxable upfront!
Say a company buys a piece of machinery for £500,000 in the year ended 31 March 2022 which they then sell in in the following accounting period to 31 March 2023 for £350,000. What are the tax consequences?
Year of purchase – 31 March 2022
£500,000 x 130% = £650,000
£650,000 x 19% = £123,500 tax saving
Year of disposal – 31 March 2023
£350,000 x 130% = £455,000
£455,000 x 19% = £86,450 tax liability
An overall tax saving of £37,050
Let’s take the above example but rather than a 31 March 2022 and 31 March 2023 year-end, let’s look at a 31 December 2022 and 31 December 2023 year-end.
Year of purchase – 31 December 2022
£500,000 x 130% = £650,000
£650,000 x 19% = £123,500 tax saving
Year of disposal – 31 December 2023
Days before 1 April 2023 – 90
Total days in accounting period – 365
90 divided by 275 = 0.25
0.3 x 0.25 = 0.075
0.075 + 1 = 1.075 or 107.5%
£350,000 x 107.5% = £379,750
£379,750 x 23.5% = £89,241.25 tax liability
An overall tax saving of £34,258.75
Note: Tax rate assumed to be 23.5% based on the rise in Corporation Tax rates from 1 April 2023.
Without going into too much more detail, rules have also been brought in to tax 50% of disposal proceeds upfront for assets on which SR Allowance Expenditure (50%) has been claimed, although this is not subject to any time limit in the future.
In summary, we would recommend that you should consider delaying buying any qualifying plant until after 1 April 2021 and that you consider your planned Capex spend over the next two years to maximise your Super Deductions.