Lee Sharpe looks at the new super-deduction for capital allowances purposes, points out where investors need to be careful with the new rules, and suggests the real reason why it was introduced.
The UK does fare well as regards capital investment. Apparently, the World Bank put the UK 104th out of 129 countries for capital investment in 2020 (as a percentage of GDP). In (out of?) Europe, we came fifth-last.
It might not look good for a Chancellor of the Exchequer to (say) introduce a policy that would actively discourage business investment further.
Surprise, surprise!
Budget 2021 included a temporary increase to capital allowances for companies:
- 130% ‘super-deduction’ in terms of the acquisition of most brand new (unused) plant and machinery that is eligible for the usual main rate pool allowance of 18%.
- 50% ‘first-year allowance’ for other expenditure (on brand-new items) that would otherwise be eligible for the 6% ‘special rate pool’.
- There is no limit on the expenditure, unlike with the 100% annual investment allowance (AIA).
-
It applies for eligible expenditure incurred on or after 1 April 2021 but before 1 April 2023.
The legislation is in the recently released FA 2021, ss 9-14, and derives from first-year allowances; hence, cars and most assets for leasing do not qualify; but see later for landlords.
So, if my company buys a brand-new van for £30,000 in July of its year ended 31 December 2021, and it is otherwise eligible for the super-deduction, the allowance for tax purposes will be:
£30,000 x 130% = £39,000
The effective rate of corporation tax relief on qualifying super-deduction expenditure will be:
19% x 1.3 = 24.7%. Broadly, 25%.
Note that landlords were originally excluded (as part of those who lease out otherwise eligible assets) generally; however, landlords were brought back into favour, broadly, for fixtures or background assets for a building (by virtue of FA 2021 s 9(9)).
Under the bonnet…
Note special rules for the super-deduction where the acquisition is in a chargeable period ending on or after 1 April 2023: the 130% rate is reduced towards 100% by reference to the extent of the chargeable period that goes beyond 31 March 2023:
(100 + number of days in chargeable period prior to 1 April 2023 x 30)%
number of days in chargeable period overall
Reducing the percentage towards 100% might seem generous, but, in broad terms, the asset must still have been acquired before 1 April 2023 to be eligible in the first place. The effect is only to reduce the benefit of the super-deduction within the qualifying period itself; the further the chargeable period of acquisition stretches beyond 31 March 2023, the lower the super-deduction.
Beware the clawback provisions
There are, of course, super-clawback provisions, which apply to subsequent disposals of assets that enjoyed either the 130% super-deduction or the 50% first-year allowance for special-rate assets. A separate balancing charge is deemed to arise on disposal, rather than (typically) proceeds being taken against the standard pools.
In terms of super-deduction assets, while the initial relief enhancement rate of 130% is reduced towards 100% to the extent that the chargeable period of acquisition extends past 31 March 2023, a corresponding uplift factor to the balancing charge is increased from 100% to as much as 130%, to the extent that the period of disposal starts before 1 April 2023.
So, if an asset is acquired in (say) February of the year ended 31 December 2023, the initial super-deduction would be:
(100 + (30 x 90/365)% = 107.4%
This would also be the factor that would be applied to the balancing charge calculated if my company were to sell the aforementioned van bought in July 2021, in (say) August 2023. If it were sold in the year to 31 December 2022, the balancing charge would be uplifted to 130%. If it were sold in the year to 31 December 2024 (or later), the factor applied to disposal value would be simply 100%.
This is clearly meant to provide a degree of symmetry, as applied to the value initially enhanced versus value received on disposal; the legislation also intends (for example) that an asset that only partly qualified for a super-deduction (e.g., a large or protracted installation for which some expenditure was in time to qualify, and some was not) will be only partly subject to a discrete balancing charge on disposal.
Likewise, to the extent that expenditure on an asset qualified for the 50% special rate, a balancing charge of up to 50% of its disposal value will be triggered on later disposal (but without adjustment if the period of disposal starts before 1 April 2023, etc.).
Why (genuinely)?
The increase in the main rate of corporation tax to take effect from 1 April 2023 (as per FA 2021, ss 6,7) is very substantial – from 19% to 25% (the change represents a hike of just over 30%). It seems very likely that, in the absence of the super-deduction, many companies would simply have postponed significant (eligible) expenditure until they could effectively secure 30% more tax relief.
Note in particular:
- The maximum effective tax saving under the super-deduction is 24.7% – basically 25%.
- The super-deduction (and the enhanced special rate) is available only to companies subject to corporation tax.
- The extra effort in the legislation to homogenise the effective tax rate, where the relevant accounting period straddles 31 March 2023.
The only real difference is that there is no expenditure ceiling for these deductions. That is a very important difference to those companies that may be contemplating expenditure in the £millions.
The super-deduction in context
Aside from endless tinkering with the AIA (which, while adequate for many businesses, is of little value when it comes to entities contemplating investment in the £millions or higher), previous Chancellors have appeared quite at ease with significant restrictions to capital allowances over the preceding few years:
- Main rate reduced from 25% to 20% in FA 2008.
- Special rate reduced from 10% to 8% in FA 2011.
- Main rate reduced from 20% to 18% in FA 2012.
- Withdrawal of the concessionary or statutory renewals basis (circa 2013/FA 2016).
-
Special rate reduced from 8% to 6% in FA 2018.
Admittedly, these measures were not all taken in isolation: for example, the 2008 main rate reduction was accompanied by the introduction of a special rate for integral features; although that could, in turn, be argued as a defensive measure in its own right, given HMRC was largely unable to stem the flow of successful claims made under the previous regime.
Reviewing Budget projections for 2007, 2011 and 2018 indicates that the Exchequer should now be saving around £5 billion a year, following those rate reductions. It is fearsome strange that governments have in the past bemoaned the lack of capital investment undertaken by UK businesses while quietly squeezing £billions a year out of any tax-based incentive to do so. Perhaps the current Chancellor (or his audience) is not so naïve?
Conclusion
Far from a fillip, I think the super-deduction regime is primarily a necessary measure to smooth the path to the main rate hike, so the UK does not witness a dearth of investment before 1 April 2023. But that does not mean larger companies (with larger investment plans) will not benefit significantly, given that there is no monetary limit to the amount of qualifying expenditure.
In situations where the company has the choice, the order of priority will generally be:
- Super-deduction at 130%.
- AIA at 100% (prioritised in favour of expenditure that would otherwise qualify for the enhanced special rate of 50%).
-
Enhanced special rate of 50%, effectively where the AIA has run out.
Assets enjoying the enhanced rates will have to be tracked separately, as the super-clawback balancing charge provisions will apply whenever an asset is disposed of, on which a super-deduction or 50% special rate deduction has been claimed – potentially many years from now. Elections under CAA 2001, ss 198 or 266 may prove useful, depending on the circumstances.
Those companies that hope to benefit from the super-deduction may want to consider shortening their accounting periods to 31 March 2023 to avoid restricting the 130% enhancement for qualifying expenditure towards the end of the period of availability.
