ExEcutivE REPORt
Super Deduction – a financial marvel?
Rishi Sunak’s announcement of a new capital allowance allows companies to reduce their taxable profits by 130% of the cost of new equipment is already attracting much interest. Adam Bernstein reports…
The Super Deduction T
he announcement has also raised a number of questions, says Will Silsby,
a technical officer with the Association of Taxation Technicians. In short, Super Deduction is a new temporary allowance which gives a greater and faster level of tax relief on qualifying expenditure incurred between 1 April 2021 and 31 March 2023. For most expenditure on plant and machinery, Silsby says that it works by treating the company as if it had spent an extra 30% on the item and then allowing tax relief on the whole of that uplifted amount. “So,” he says, “with a 19% tax rate, the Super Deduction is designed to reduce a company’s tax bill by some 24.7% of the actual cost of the qualifying item.”
However, the allowance is only available to those which are subject to Corporation Tax and still active.
Certain expenditure qualifies The Super Deduction only applies to items which are treated for tax purposes as plant and machinery. For many businesses, Silsby says that “this is likely to cover most of their expenditure and simple examples of plant and machinery would include anything from a laptop to a double-decker bus. In contrast, a building or structure, or something intangible such as a franchise, cannot be plant or machinery and will not be eligible.”
He also makes clear that a special provision in the legislation means that “any expenditure incurred as a result of a contract which was entered before 3 March 2021 will be ineligible as the expenditure is treated as made before 1 April 2021 regardless of when payment was required.”
Some items of plant or machinery are specifically excluded from eligibility. Common examples include cars; used and second-hand assets; and plant or machinery which is leased out to another.
Practical effects Before delving into the effects of the Super Deduction, Silsby notes all businesses are already entitled to an Annual Investment Allowance (AIA) which enables them to get tax relief on the whole of their qualifying expenditure for the year of purchase, up to an annual limit.
“Until 31 December 2021 the AIA limit is £1 million, but is scheduled to reduce to £200,000 from 1 January 2022,” he explains, adding, “the higher limit means that a company spending £500,000 before 1 April 2021 on plant or machinery will (without the
‘‘ Super Deduction only
applies to items which are treated for tax
purposes as plant and machinery … simple
examples would include
anything from a laptop to a double-decker bus
Super Deduction) get a tax reduction at 19% on that amount – so £95,000. If that same level of expenditure was incurred after 31 March 2021 and qualified for the Super Deduction, the tax reduction would instead be £500,000 x 130% which, at 19%, gives a tax reduction of £123,500 – so £28,500 more.”
’’
Special Rate allowance As already noted, some items of plant and machinery are not eligible for the Super Deduction. This includes all items of capital expenditure which are treated as ‘special rate’ assets. Silsby details that these assets include integral features of a building (like heating, lighting and power systems and air conditioning), long life assets, thermal insulation and solar panels.
He says that “under the general capital allowance legislation, the annual Writing Down Allowance on these items of plant or machinery is just 6% rather than the normal 18% meaning that these ‘special rate’ assets are written off more slowly for tax purposes.”
But there’s a catch, says Silsby: “If a company incurs qualifying expenditure on these types of asset in the two-year period starting on 1 April 2021, they cannot qualify for the 30% value boost.” However, he says that companies in this situation will be, provided that the particular assets are not specifically disqualified, entitled to new Special Rate Allowance – this “provides tax relief for the year of expenditure on 50% of the actual cost instead of just 6%. Unlike the Super Deduction, this does not increase the value of tax relief over the life of the asset, but it does significantly accelerate the relief.”
Tax losses Another feature of the capital allowances regimes is that, as Silsby says, “companies can normally carry back losses from one accounting period to the previous accounting period so that the profits of that previous period are reduced. This enables a repayment of Corporation Tax for the previous period. But because of the pandemic, the Chancellor has announced that losses arising in a company’s accounting period which ended between 1 April 2020 and 31 March 2022 can be carried back for two further years.”
Lastly, an important consequence of the 130% Super Deduction and the Special Rate Allowance is that part of the tax reduction will be clawed back if the relevant asset is subsequently sold.
In summary With the complexities set down, it is essential for companies to take appropriate professional advice. n
12 Executive Hire News - June/July 2021
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