A new ‘super deduction’ was announced at Budget 2021 for companies investing in qualifying capital expenditure from 1 April 2021 for a two-year period.
The relief
The new relief gives an enhanced 130% deduction for qualifying expenditure on new and moveable plant and machinery incurred between 1 April 2021 and 31 March 2023. For example, if a company were to purchase new machinery after 31 March 2021 costing £100,000, capital allowances will be available on an enhanced figure of £130,000. At the current rate of corporation tax of 19%, this will result in total corporation tax relief of £24,700, £5,700 of which being an additional tax reduction.
The relief is only available to companies and not unincorporated businesses. The reason behind this appears to be to effectively offer 25% tax relief on new capital investments now, prior to an increase in the corporation tax rate for companies, with profits in excess of £250,000, to 25% from 1 April 2023, which was also announced in the Budget.
Qualifying expenditure
Typical expenditure which will qualify for the enhanced rate would include new computers, office furniture, machinery, tools, software and vans. Specifically excluded expenditure includes purchases of second-hand assets, cars, long life assets and plant and machinery which would qualify for special rate capital allowances (e.g. integral features such as electrical, heating and lighting systems).
A 50% first year allowance (rather than the current 6% writing down allowance) was also announced for special rate expenditure on integral features which is not eligible for the new ‘super deduction’. In reality, however, it is likely to be more beneficial for most companies to instead claim the annual investment allowance (AIA). The AIA provides 100% relief for expenditure incurred up to £1 million until 31 December 2021, before reducing to £200,000 thereafter. The 50% allowance could become of use if the AIA allowance for the relevant period is exceeded, which may be relevant for large groups and/or significant new capital projects.
Timing
If you are considering investing in new plant or equipment in the near future, it is likely to be more tax efficient to delay the purchase until after 31 March 2021, to benefit from the enhanced reliefs available.
A few points to be aware of on timing, however, include:
- Relief under the new super deduction will not be available where arrangements (e.g. a contract) for the expenditure was entered into prior to 3 March 2021. This is because the intention of the relief is to encourage new investments and, therefore, committed expenditure prior to Budget day will not be eligible.
- Care should also be taken in respect of the timing of the expenditure, to ensure it falls within the period after 1 April 2021. Where the asset is purchased outright, the acquisition date for capital allowance purposes is normally the date on which the obligation to pay becomes unconditional. If the goods are, therefore, received prior to 1 April 2021, even if the legal obligation to pay is not for some time after (but less than four months from delivery) this could forego eligibility for the enhanced relief.
- Although the super deduction will come to an end in April 2023, the 25% corporation tax rate will then apply for larger companies, which will mean that the tax deduction will effectively remain the same where the expenditure qualifies for the AIA (subject to point 4 below). The AIA is expected to be set at £200,000 by this point and so there may not be a need to accelerate expenditure where investments are anticipated to be below this threshold. This should, however, be assessed closer to the time, once the position is clear.
- For accounting periods that straddle 1 April 2023, there will be an apportionment of the relevant super-deduction percentage that applies to expenditure incurred in the period prior to that date. For example, a company with a December year end will have a super deduction of 107.4% on qualifying expenditure incurred between 1 January 2023 and 31 March 2023, rather than 130%. In this case, therefore the company may be better delaying the expenditure to post 31 March 2023, when the corporation tax rate increases to 25%. Again, as with point 3 above, this decision will depend on the level of AIA available at that time and applicable tax rate to the company.
It is worth reviewing any planned expenditure to fully understand the impact on your company, depending on your company’s accounting year end, as a delay in purchase may impact cashflow by delaying corporation tax relief by up to 12 months.
Interaction with new loss carry back rules
The Budget also introduced an extended loss carry back period for businesses, from one year to three years.
With careful planning, companies may be in a position to maximise capital expenditure between 1 April 2021 and 31 December 2021 to take advantage of the enhanced 130% relief and utilising the £1 million AIA limit, potentially creating a corporation tax loss. Using the new loss carry back extension rules, the company could, potentially, secure a substantial refund of corporation tax paid on trading profits in the previous three years. You should, however, also consider the benefit of carrying these tax losses forward, especially if they could be utilised post April 2023 when corporation tax rates are due to increase.
Disposals
If enhanced tax relief is claimed and the relevant asset is later disposed, a balancing charge may arise and the rules on this are fairly complex. The rules differ depending on when the disposal takes place and specifically whether it is in an accounting period that commences pre or post 1 April 2023. Broadly, the balancing charge will be based on 130% of the proceeds for disposals pre April 2023 and for disposals taking place during an accounting period straddling 1 April 2023, the proceeds will be apportioned to 130% for the proportion prior to 1 April 2023, tapering down to 100% by 31 March 2024.