Joe Brough examines the impacts of the ending of the super deduction and special rate capital allowances from 1 April 2023.
In March 2021, the government announced that a new first year allowance super deduction and special rate of capital allowance was to be made available to companies investing in qualifying plant and machinery. The availability of the allowances followed the announcement that from 1 April 2023, the main rate of corporation tax would be increased to 25%, from the current 19% rate.
From 1 April 2023, the increase in the main rate of corporation tax will apply to companies with taxable profits of £250,000 or more. Companies with a taxable profit of £50,000 or less will continue to pay tax at the current rate of 19%. Companies with profits between £50,001 and £249,999 will pay tax at the main rate of 25%, albeit with the benefit of marginal rate relief.
Generous reliefs
For qualifying main rate plant and machinery assets purchased between 1 April 2021 and 31 March 2023, a super deduction first year allowance (FYA) of 130% can be claimed. A 50% special rate (SR) allowance is also available for qualifying special pool assets. For any expenditure which does not qualify for the super deduction FYA or SR allowance, capital allowances can still be claimed by way of the annual investment allowance (AIA), or by writing down allowances (WDAs).
The super deduction and SR allowance was introduced partly to stimulate the economy post Covid-19, and to encourage companies not to delay their investment in qualifying plant and equipment until the increase in corporation tax takes effect. As can be seen in Example 1, the effect of claiming the 130% allowance is to obtain a tax deduction equivalent to 25%, whilst the main rate remains at 19%.
Example 1: Claiming the super deduction
Alfie Ltd has pre-tax profits of £100,000 for the year ended 31 March 2022. The company has invested £20,000 in machinery qualifying for the 130% super deduction capital allowance.
Tax payable before capital allowances: £100,000 x 19% = £19,000
Tax effects of claiming the super deduction £20,000 x 130% = £26,000
Corporation tax payable: (£100,000 - £26,000) = £74,000 x 19% = £14,060
By investing £20,000 the tax saving of £4,940 gives an effective tax saving of 24.7% on the qualifying spend.
Which assets qualify?
The qualifying conditions for the super deduction and SR allowance are set out in FA 2021, s 9. These are:
- the expenditure is incurred after 1 April 2021 and before 31 March 2023;
- it is incurred by a company within the charge to corporation tax;
- the plant or machinery is unused and not second-hand;
-
the expenditure is not within any of the general exclusions (in CAA 2001, s 46(2)).
Key exclusions to the availability of the super deduction and SR allowances are cars, and plant and machinery made available for leasing. However, where background plant and machinery is made available within the lease of a building, an exclusion to this provision is provided (by FA 2021, s 9(9)).
The date of expenditure for the purposes of capital allowances is provided (by CAA 2001, s 5) as the date that the obligation to pay becomes unconditional. However, for the purposes of claiming the super deduction and SR allowance, this provision is disapplied for any contracts entered into prior to 3 March 2021, which makes the date the contract was entered into the date of expenditure for capital allowances purposes.
Accounting periods spanning 1 April 2023
You would be forgiven for thinking that as long as the qualifying expenditure takes place before 31 March 2022, the super deduction would be claimable in full. However, as is often the case when there is a change in the availability of a capital allowance, there is a sting in the tail to be mindful of.
Where a company has an accounting period which straddles 31 March 2023, the amount of super deduction FYA which can be claimed (note that SR allowance is unaffected) is proportionally reduced (FA 2021, s 11). The reduction will be determined by the number of days in the accounting period falling prior to 31 March 2023 and is referred to as the ‘relevant percentage’.
The relevant percentage is calculated broadly as follows:
- dividing the number of days in the relevant period before 1 April 2023 by the total number of days in that period;
- multiplying the result by 30;
-
adding 100 to the result.
The effect of this calculation is that where qualifying expenditure takes place in a period straddling the 1 April 2023, the FYA will not be 130%.
Example 2: Calculating the relevant percentage
AVA Ltd has a year end of 31 December 2023 and incurred qualifying super deduction expenditure of £10,000 on 31 January 2023. The relevant percentage is calculated as follows:
(90/365) x 30 + 100 = 107.40%
This results in a tax deduction of £10,740. If the same expenditure had been made in the year to 31 December 2022 a deduction of £13,000 would have been available. For a company paying tax at the small profit rate of 19% the difference in tax payable is £429.40.
Disposals
A similar process will have to be performed for any disposals of assets which have previously been subject to a super deduction claim.
Such expenditure is not allocated the main capital allowance pool as normal. On disposal of such assets, an immediate balancing charge is calculated. The amount of disposal proceeds brought into account is determined by multiplying the disposal proceeds by the ‘relevant proportion’ followed by the ‘relevant factor’.
The relevant proportion is calculated by dividing the expenditure on which a super deduction claim was made, by the total relevant expenditure on the asset. Where the whole of the expenditure was claimed as a super deduction, the relevant proportion will be one.
Where the disposal takes place in a chargeable period ending before 1 April 2023, the relevant factor is 1.3. The effect of this is to claw back the tax saving by claiming the super deduction in the first place.
For periods ending on or after 1 April 2023 the relevant factor is calculated by:
- dividing the number of days in the period before 1 April 2023 by the total number of days in that period;
- multiply that amount by 0.3;
-
add 1 to the result.
The effect of these steps is to reduce the amount of the balancing charge that is assessable. This works in a mirror image of the expenditure rules detailed above.
Practical tip
It is important to note that it is not only the date that the qualifying expenditure is incurred which determines the amount of super deduction available. Consideration also needs to be given to the period end and how this affects the relevant percentage.
For a company with a year-end straddling the rate change, the reduced amount of super deduction may mean that it would be beneficial for the company which will continue to pay corporation tax at 19% after 1 April 2023 to accelerate its capital expenditure where possible into the prior period. Similarly, where a company is able to defer the sale of assets on which the super deduction has been claimed, this may result in a lower balancing charge being assessed.
In determining the timing of expenditure and disposals, there won’t be a ‘one size fits all’ approach, as it will depend on the taxable profits of the company in question, and at what rate of corporation tax the company pays.
