Super deduction Capital Allowance

Overview of Super deduction Capital Allowance

A new 130% first-year capital allowance for qualifying plant and machinery assets; and a 50% first-year allowance for qualifying special rate assets

Chancellor Rishi Sunak said: ‘With the lowest corporation tax in the G7, we need to do even more to encourage businesses to invest – for decades we have lagged behind our international peers. We need to unlock cash reserves so today I can announce the super-deduction. For the next two years when companies invest, they can reduce their tax bill with super deduction by 130% of the cost.

What are rates for Super deduction of capital allowances?

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:

• a 130% super-deduction capital allowance on qualifying plant and machinery investments;
• a 50% first-year allowance for qualifying special rate assets.

The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive.

Impact of Super deduction capital allowance

Chancellor Sunak said;

‘We’ve never tried this before in our country – the Office for Budget Responsibility (OBR) says it will boost investment by £20bn a year. It is worth £25bn for the two years it is in place, this is bold, unprecedented action.’

Is Super deduction of Capital allowances only available for companies?

The super deduction of capital allowances is only available to companies subject to corporation tax and not to sole traders, partnerships or limited liability partnerships. That perhaps appears harsh for unincorporated businesses, but it is worth remembering that they will still benefit from the £1m 100% annual investment allowance which remains until at least 31 December 2021. Also, only companies will suffer the six-percentage point tax rate hike to 25% from financial year 2023/24. So, presumably the chancellor’s thinking was to balance a 25% investment sweetener now (i.e. 130% relief x 19% tax rate), with the pain of a 25% tax rate when these incentives expire.

What is the deadline for Super deduction of capital allowances?

The new rules on super deduction of capital allowances have a strict end date for expenditure incurred up to 31 March 2023. But in practice they have a floating start date because expenditure must be after 1 April 2021 and the contract must be entered into from 3 March 2023. This means that lots of expenditure over the next couple of years will not be eligible because it was already committed to before Budget day. And given the usual delay between signing a contract and incurring expenditure, there may be limited qualifying expenditure in the early months of these measures.

Future tax implications of super deduction capital allowance

Special disposal rules will be applied to assets against which this allowance has been claimed such that the disposal proceeds of these assets will be uplifted to 130%, to take account of the fact that the extra relief on the original expenditure was available. Where disposals occur in accounting periods straddling 1 April 2023, the uplift will be calculated on a pro-rata basis. Note, this rule does not apply to the 50% first-year allowance for special rate expenditures.

Expert’s opinion on Super deduction Capital Allowance

The move has been widely welcomed by accountants and should act as a major investment catalyst.

Mark Minihane, EY UK & Ireland advanced manufacturing & mobility tax leader, said: ‘Manufacturing businesses will welcome the super-deduction incentive for investing in new equipment, and will be eager for more detail on what exactly this will cover. However, the two-year period for the relief is a little disappointing.’

Portia Pierrel, director at PwC said: ‘This measure will allow a temporary first-year allowance; including a super-deduction of 130% on most new plant and machinery investments which would have ordinarily qualified for 18% relief, and a first year allowance of 50% on most new plant and machinery investments which would have ordinarily qualified for 6% relief.

‘This will provide not only an accelerated timing benefit but additional tax relief on expenditure incurred. For example, we anticipate a manufacturer incurring £10m of expenditure on a new factory to receive an additional £1m of cash tax saving over the two-year period the measure is in place.  

‘These measures will be welcomed by businesses and will encourage an immediate acceleration of investment, instead of holding off. It is expected to benefit capital intensive businesses, such as manufacturers and utilities companies in particular.

‘However, care will need to be taken in relation to certain assets, such as vehicles and leased plant and machinery, which may be subject to restrictions.’

Minihane expects to see further announcements on Tax Day on 23 March when the Treasury will release further consultations on new tax proposals. ‘While the Chancellor is understandably focused on Covid-19 relief, it’s important the UK is also positioned for long-term growth. A healthy and growing manufacturing industry could be the foundation for a post-pandemic recovery and a key part of the strategy for a post-Brexit world, while also creating skilled jobs throughout the supply chain. The sector will be hoping the 23 March tax consultations announcement provides further encouragement.’

Richard Godmon, tax partner at accountancy firm, Menzies LLP, said: ‘The Chancellor’s ‘super deduction’ is a record-breaking opportunity for businesses to reduce their corporation tax liability by 130% of the value of any investment they are making in the next two years on qualifying plant and machinery. This equates to a significant cash windfall for businesses and will help to bolster cash flow at a critical time.’