Kevin Read discusses some of the things about the capital allowances ‘super-deduction’ that the Chancellor did not mention in his Budget speech.
The capital allowances ‘super-deduction’ is available for expenditure between 1 April 2021 and 31 March 2023 on new (i.e. not second-hand) qualifying plant and machinery (P&M) that would normally go within the main capital allowances pool.
It is only available to businesses within the charge to corporation tax, not unincorporated businesses or LLPs, and there are certain exclusions, including most cars and expenditure contracted for before 3 March 2021.
At its maximum amount of 130%, the super-deduction means that every £1,000 of expenditure produces a tax deduction of £1,300 up-front with relief at 19%, equating to a tax saving of £247 (or 24.7%) on the amount spent. The aim is to encourage companies to invest before the main corporation tax rate goes up to 25% (for companies with profits of at least £250,000) in April 2023.
Lower rate of super-deduction
Where an accounting period straddles 1 April 2023, the main rate of corporation tax will be somewhere between 19% and 25%, the exact rate determined on a pro rata day-count basis. In such an accounting period, the super-deduction is available on expenditure up to 31 March 2023, but at a reduced rate.
Example: Big Six Ltd claims the super-deduction
Big Six Ltd, in its accounting period ended 30 June 2023, spends £40,000 on general pool P&M in January 2023.
The super-deduction is available for the period 1 July 2022 to 31 March 2023 (i.e. 274 days), so the percentage super-deduction is calculated as [((274/365) x 30)+1] = 122.52%.
Disposal of super-deduction expenditure
Usually, when P&M goes into a capital allowances pool it minimises record-keeping for the purchaser, as any subsequent sale proceeds (restricted to cost) are simply deducted from the pool in due course.
This will not be the case with super-deduction expenditure, as any disposal proceeds must be separately recorded as a balancing charge (i.e. immediately taxable profit) rather than coming off the pool.
This balancing charge treatment also applies to ‘special rate pool’ expenditure (such as integral plant in buildings) on which companies claim a 50% first-year allowance from 1 April 2021 to 31 March 2023.
Without further rules, it would be possible for a company to buy P&M in its year ending 31 March 2022, claim 130% tax relief, then sell it in the next period with a balancing charge equal to the sale proceeds. As the tax rate is the same (19%) in each case, this would give a ‘free’ tax break to the company. The Finance Bill legislation (which has not received Royal Assent at the time of writing) deals with this by stating that there must be an appropriate adjustment made to the sale proceeds where the disposal of super-deduction expenditure occurs in an accounting period beginning before 1 April 2023. For the year ending 31 March 2023, the balancing charge would be 130% of sale proceeds, while for the year ending 30 June 2023, it would be 122.52%.
Unintended consequences?
The distinction between capital and revenue expenditure is often nuanced. In borderline cases involving P&M, companies may want to argue for capital treatment in order to get the super-deduction.
Also, previous super-deduction claims will become a major consideration in business disposals. In an asset sale, significant balancing charges may arise; in a share sale, there may not be full provision for the impact of a future sale of assets on which the super-deduction has been claimed.
Planning tip
P&M on which the super-deduction or 50% FYA has been claimed will need to be tracked over the asset’s period of ownership, in a similar way to assets subject to a short-life asset de-pooling election, so that a balancing charge can be calculated on disposal. Care will be needed, though, as the asset will not have been de-pooled at acquisition.
