Is your company maximising the new Super Deduction tax allowance?
What is it and is it worth accelerating spend?
For a limited window 1 April 2021 to 31 March 2023, companies investing in qualifying plant and machinery assets can benefit from a 130% first year allowance. This upfront “Super Deduction” will allow companies to cut their tax bill by 24.7p for every £1 that they invest.
In addition to the 130% Super Deduction, companies can also benefit from a 50% First Year Allowance for qualifying special rate (including long life) assets. This will provide relief for qualifying expenditure that would have ordinarily be relieved at the special rate writing down allowance of 6%.
Companies are already currently provided with a £1 million Annual Investment Allowance (AIA). With the AIA expected to reduce to £200k in 2022, and the enhanced 130% rate, the new reliefs should be considered to maximise the tax position for the company.
Certain assets do not qualify for the Super Deduction; for example, cars, leased assets and second hand assets. This is not an exhaustive list and companies should seek advice ahead of purchasing assets to ensure they qualify. It is also important to note that contracts entered into prior to 3 March 2021 will likely be outside of the new reliefs.
Be mindful of disposals
Consideration must be given to potential future disposals of the plant and machinery that the Super Deduction has been claimed on, since balancing charges apply on disposal. If the disposal is made in the period up to 31 March 2023, the disposal proceeds are taken and a factor of 1.3 applied in order to calculate a balancing charge. This factor does not apply to the 50% First Year Allowance.
Additional restrictions have been introduced for assets acquired under hire purchase and similar types of contracts where possession of the assets are transferred but not the ownership, impacting who is entitled to claim the capital allowances. This may have an impact on the purchase of large items of plant under contracts that require advance payment.
Consider wider tax profile
Consideration should be given to the interaction of the Super Deduction with other reliefs to maximise the company’s tax position overall. For example, the enhanced reliefs can be considered in conjunction with the ability to utilise losses, especially with the extended carry back facility, which could lead to substantial tax repayments to aid cash flow. Interaction with R&D tax credits may also aid cash flow.
There is also an opportunity to look at a company’s investment in computer software and the availability of tax relief through the Super Deduction or R&D. This will depend on the company’s spend and accounting treatment.
Overall a very attractive relief, however not without its pitfalls and consideration should be given in advance of investment decisions to ensure that the company’s wider tax position is optimised.