The new ‘super deduction’ announced in the recent Budget has certainly got everyone talking. Hailed as a measure to boost investment and productivity throughout the UK in the post-Covid landscape, what does this wonder product actually entail?
The super deduction is essentially an enhancement to the existing tax relief already available through capital allowances claimed on new qualifying plant and machinery.
The super deduction takes the form of:
OR
One key difference to note here is that, unlike the current annual investment allowance (AIA ), the super deduction is uncapped.
So far, so good. However, the small print as always reveals more detail, and in this case, indicates that the much-heralded relief may be less beneficial than hoped.
-
Purchases made from 1 April 2021 onwards but prior to 1 April 2023 will qualify for the super deduction, provided the taxpayer has not entered into the contract to purchase the asset before 31 March 2021.
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The new relief is only available to incorporated companies, and only for new plant and machinery, not second-hand equipment.
The main result of the above conditions is that claims cannot be made on assets purchased as part of a property transaction, unless the property is acquired brand new and directly from the developer.
Furthermore, special rate pool assets will only receive the lower deduction of 50%.
The following provides an illustration of the relief for the acquisition of a qualifying main pool asset for a chargeable period ending 31 March 2022.
| |
Main Pool
£ |
Main Pool Asset for Super Deduction
£ |
Capital Allowances
£ |
| TWDV b/f |
500,000 |
|
|
| Additions |
|
100,000 |
|
| |
|
|
|
| WDA 18% |
(90,000) |
|
90,000 |
| Super Deduction 130% |
|
(130,000) |
130,000 |
| |
|
|
|
| TWDV c/f |
410,000 |
|
|
| |
|
|
|
| |
|
TOTAL |
220,000 |
A combination of the current corporation tax rate of 19% and the capital allowances super deduction results in £24,700 of tax deductions from the £100,000 investment, as illustrated above.
However, the super deduction assets are not pooled, meaning that the disposal of an asset which has previously been subject to a super deduction will result in a balancing charge.
Continuing on from the figures above, the following example indicates how such a balancing charge would be calculated for a chargeable period ending 31 March 2023.
| |
Main Pool
£ |
Main Pool Asset for Super Deduction
£ |
Capital Allowances
£ |
Balancing Allowance / (Charge)
£ |
| TWDV b/f |
410,000 |
|
|
|
| Disposal |
|
(104,000) |
|
|
| |
|
|
|
|
| Balancing charge |
|
134,000 |
|
(50,000) |
| WDA 18% |
(73,800) |
|
73,800 |
|
| |
|
|
|
|
| TWDV c/f |
336,200 |
|
|
|
| |
|
|
|
|
| |
|
TOTAL |
23,800 |
|
For disposals before 1 April 2023, proceeds will be deemed to be 130% of the amount received. For accounting periods straddling this date, a tapering charge is applied.
This can be interpreted as a form of ‘claw-back’ of tax relief, and it is worth considering the longer-term implications of such a large investment – what may seem like jam today as a result of the super-deduction could very well result in a corporation tax cost tomorrow!
In the short-term, the super deduction certainly does what it says on the tin - it creates an opportunity to obtain tax relief on large development projects. One way of maximising the deduction is by using it to create a corporation tax loss. Such a loss can be temporarily carried back three years rather the usual one year. The above scenario and others should of course be discussed in detail with a company’s advisors, as no two situations will be alike.
So is it worth it? Every company will no doubt have different reasons for the timing of any capital investment undertaken, but the super deduction may well prove be an inducement to invest in the window from 1 April 2021 to 31 March 2023.
It is worth considering, however, that by 1 April 2023, the corporation tax rate will have risen to 25%, and the super deduction will have come to an end. The combined effect of these changes means that a £100,000 investment in 2023 will actually equate to £25,000 in tax deductions - a mere £300 more than the investment at the time of the super deduction!. A matter of style over substance? You decide.
At the time of writing, the legislation remains in draft, although it is not expected to be subject to significant revisions. However, we at Markel Tax are already considering the implications for our clients, and watching any Treasury releases closely. For more information or advice on anything mentioned in this article, please contact Adam Ellerington or call us on 0333 305 3667.