The super-deduction and what to watch out for

In March 2021, the Chancellor announced the new super-deduction capital allowance, which is aimed to encourage investment in the economy over the next two years. However, careful consideration should be taken when looking at this allowance. There are some hidden conditions which were less publicised and can mean the relief isn’t as attractive as it appears at first glance.

Firstly, it is only available for companies, so sole traders and partnerships will not benefit from the relief.

The allowance applies to new plant and machinery purchased between 1 April 2021 and 31 March 2023, and differs depending on the type of asset purchased. There is also no limit on the relief, provided the expenditure is incurred on qualifying assets.

So, how does the allowance work?

• For assets that would normally fall into the ‘main pool’ and attract the 18% writing down allowance, this allowance means that the company benefits from a deduction of 130% of the expenditure.
• For assets that would normally fall into the ‘special rate pool’ and attract the 6% writing down allowance, the company benefits from a 50% deduction in the year of purchase, before resuming the usual 6% deduction per year, on the balance.

There are a number of assets that are excluded from the relief, including used or second-hand assets, cars and plant and machinery purchased for leasing. Be careful to check that the asset you are looking to purchase will qualify for the relief, before calculating the possible tax relief available.

If a company entered into a contract to purchase assets before 3 March 2021, then it also won’t benefit from the relief, even if the expenditure is incurred after 1 April 2021 (in the qualifying period).

A qualifying asset is kept separate to other plant and machinery in the main capital allowance pool. Therefore, if the asset is sold, an immediate balancing charge is created, which is subject to corporation tax. Depending on the timing of the sale, the company may also have to increase the sales proceeds by 130% for tax purposes.

The Chancellor also announced increases to the corporation tax rates. Although the super-deduction might initially create an incentive to accelerate capital expenditure, this might not result in the most tax efficient position, factoring in the proposed increase in corporation tax.

The following example illustrates this:

ABC Ltd has a year end of 31 March, and is planning to spend £75,000 on assets that would qualify for the super-deduction, sometime in the next few years. The company expects to make a profit in excess of £50k per year for the foreseeable future.

If it purchases the assets in the year ended 2022, the super-deduction will result in a tax reduction of £18,252, whilst Corporation Tax rates are at 19% (£75,000 x 130% x 19%).

If it purchases the assets in the year ended 2024, the super-deduction would not be available. However, now the higher rates of corporation tax apply. If profits are between £50-250k, the tax reduction would be £19,875 (£75,000 x 26.5%), or if profits are above £250k, the tax reduction would be £18,750 (£75,000 x 25%).

When making a decision about capital expenditure, it should always be based on commercial need and not just tax relief available. You should complete some calculations to aid the decision-making process.

It’s worthwhile mentioning that the annual investment allowance may be available for assets which do not qualify for the super-deduction. This is capped at £1m for the year to 31 December 2021, set to reduce to £200k after that.

If you have any questions on this, please contact your usual point of contact within Albert Goodman who will be able to assist you further.