Background
The Budget 2021 saw Chancellor Rishi Sunak introduce a new 130% super deduction capital allowance for companies and there has been a recent extension of the rules to now include leased assets. The super deduction is aimed at encouraging investment in plant and machinery by companies now rather than waiting until April 2023 when the tax saving will be at 25% rather than 19%. Whilst it is an appealing allowance for many to be able to claim there are other considerations to take into account and this week’s Muras Matters looks at some of these as well as other recent and upcoming changes.
When considering new capital expenditure it will be important to consider the timing of this expenditure not only in regard to the availability of the super deduction but also the fact that the Annual Investment Allowance (AIA) which provides 100% tax deduction for eligible expenditure is due to reduce from its current extended limit of £1 million back to £200,000 from 31 December 2021. The ending of the temporary extension of the AIA will impact both companies and unincorporated businesses.
Detail
Super-Deduction Capital Allowances – the basics
The super deduction provides a 30% uplift on eligible expenditure and seeks to compensate companies for bringing forward capital expenditure, rather than waiting until the corporation tax (“CT”) rate increases to 25% from April 2023 when the tax relief available may otherwise be greater. Taking into account the current CT of 19% the super deduction gives an effective rate of relief of 24.7%, almost equivalent to the future 25% CT rate.
From 1 April 2021 until 31 March 2023, companies investing in qualifying new assets will be able to claim:
- a 130% super-deduction first-year capital allowance on qualifying plant and machinery;
- a 50% first-year capital allowance for qualifying special rate assets.
The following provides a basic guide to the new super-deduction:
- It will apply to companies only involved in a qualifying activity, such as a trade, UK property letting business and furnished holiday letting business.
- The 130% first year allowance will apply to expenditure which usually qualifies for main rate writing down allowances, and a 50% first year allowance will apply to expenditure which usually qualifies as special rate assets (subject to certain exclusions).
- Expenditure must be on new and unused plant and machinery. Excluded assets include:
- Second hand plant and machinery;
- Cars;
- Assets acquired from connected party transactions.
Extension of rules to leased assets
When the 130% super deduction was originally revealed on Budget Day leased assets were specifically excluded from being eligible. However, an amendment has been recently announced to enable the super deduction to be extended to include leased assets. This will be of particular benefit to companies for example who fit out their buildings with plant and machinery which they then lease out to tenants.
Date expenditure incurred
The super deduction will apply to expenditure on assets between 1 April 2021 and 31 March 2023, but excludes expenditure contracted for prior to 3 March 2021. Therefore, determining the date expenditure is ‘incurred’ will be especially important. Generally for capital allowances expenditure is treated a incurred when there is ‘an unconditional obligation to pay’ unless payment occurs more than four months after this date, in which case the actual payment date becomes the deemed incurred date.
Special rules apply for determining when expenditure under hire purchase and similar contracts is deemed to have occurred.
The normal rules for pre-trading capital expenditure, that allows such expenditure to be treated as incurred on the first day of trading, will not apply. Instead, the benefit of the 130% allowance will only be available if the expenditure is actually incurred in the two year period to 31 March 2023 when the company is trading.
Subsequent disposal of super deduction assets
Special rules apply to the disposal of plant and machinery which have previously benefited from the super deduction with an element of the enhanced tax relief being clawed back at the time of disposal.
Disposal of an asset before 1 April 2023 on which a super deduction has been claimed will be subject to a balancing charge of 130% of the disposal proceeds. A rate of between 100% and 130% will apply to the disposal proceeds for accounting periods straddling the 31 March 2023.
For accounting periods ending after 31 March 2024. The balancing charge will be the disposal proceeds.
Therefore where an asset is likely to be used by the company for a short period or is likely to have a high second-hand value then the company may well need to consider if claiming the super deduction on acquisition is the most tax efficient method of claiming tax relief.
For special rate assets on which the 50% deduction is claimed similar rules will apply whereby the deemed disposal proceeds will be 50% of the assets actual disposal value. However, for many business it may still be more beneficial to claim 100% AIA on special rate assets such as integral features rather than the 50% super deduction, which is only likely to be considered where the AIA limit has already been fully utilised.
It will be important to keep records of individual assets on which the super deduction is claimed to ensure any necessary claw backs on disposal can be appropriately identified.
Accounting periods straddling 1 April 2023
Looking ahead, transitional rules apply for eligible expenditure incurred in accounting periods straddling 1 April 2023 which require the super deduction to be reduced on a pro-rata basis depending on the number of days in the company’s accounting period to 31 March 2023.
Annual Investment Allowance
The AIA continues to offer 100% first year relief for eligible capital expenditure of up to £1 million until 31 December 2020 when the limit is due to reduce back to £200,000. The AIA limits apply to both companies and unincorporated businesses.
For those businesses whose accounting period will straddle the 31 December 2021 it is worth noting that the AIA limits will be pro-rated so businesses anticipating large capital expenditure in the next 12 months will need to be aware of the timing of that expenditure if they are looking to make use of the maximum AIA available.
The AIA will be available to companies for some assets not eligible for the super deduction or where the company decides not to claim the super deduction, which could well be the case for special rate assets, since 100% relief is still better than the 50%
Capital Allowances for Cars
Changes to the claiming of capital allowances for cars have recently come into effect to try to encourage businesses to choose more environmentally-friendly vehicles as follows:
- The 100% first year allowance (FYA) for qualifying cars and qualifying zero-emission goods vehicles has been extended until spring 2025;
- From 1 April 2021, the FYA for qualifying cars have been reduced to zero emissions( previously 50g/km); and
- From 1 April 2021 (6 April 2021 for unincorporated businesses), cars must have emissions levels of 50g/km or less to qualify for the 18% writing down allowance (previously 110g/km), otherwise they will only qualify for the 6% writing down allowance.
The above highlights whilst there are significant tax reliefs available for investing in capital expenditure planning this expenditure can be equally important given the increased complexity and interaction of different reliefs and the periods they are available.
If you have any questions or require further information regarding any of the changes outlined above or would like assistance in planning your capital expenditure please speak to your usual contact at the firm.
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