As part of the Chancellor’s plan to boost the UK economy after the Covid-19 pandemic, the Chancellor announced new measures during his March 2021 budget to encourage companies to invest in new plant and machinery over the next couple of years that need careful consideration.

One of these measures was the introduction of a new super deduction which entitles a company to a 130% relief for expenditure on main pool plant and machinery assets.
A further special rate allowance of 50% on expenditure which formerly would have attracted writing down allowances (WDA) of 6% in the special rate pool
has also been introduced.

Qualifying conditions:

In order to qualify for the relief, the following conditions must be met:

1) It is only available for companies, including property companies. Sole traders and partnerships are not entitled to the relief.

2) The expenditure must be incurred on qualifying assets between 1 April 2021 and 31 March 2023. It is important to note that the relief will be denied if there were arrangements in place to purchase the asset prior to 3 March 2021.

3) The assets must be brand new and not second hand or used.

4) The asset must not fall within the general exclusions in relation to claiming capital allowances:

a. Expenditure falls in a chargeable period where the trade is permanently discontinued;
b. Expenditure on leased plant and machinery;
c. Expenditure on assets which were not acquired for the trade; and
d. The asset was gifted to the company.

Qualifying expenditure

The additional relief is only available on new and moveable plant and machinery. The policy explicitly excludes second hand and used equipment as these investments would not meet the policy objective to improve the UK economy.

Examples of assets which would qualify for the relief are:

• Computer equipment;
• Office furniture e.g. chairs and desks;
• Machinery;
• Tools;
• Software;
• Toilets and kitchen facilities;
• Tractors, lorries, vans; and
• Electric vehicle charge points.

The relief is not available on investments in cars, second-hand assets, long life assets and integral features such as electrical, heating and lighting systems.

As mentioned above, expenditure on special rate expenditure, such as integral features and long life assets will instead qualify for a 50% first year allowance.

Disposals of assets where super deduction claimed

Companies need to be aware that a balancing charge could arise if the company subsequently disposes of an asset which they have previously claimed the super deduction on. How the balancing charge is calculated will depend on when the asset is disposed of.

Broadly speaking, if the asset is disposed of before 1 April 2023 the balancing charge will be based on 130% of the proceeds. For disposals that straddle the 1 April 2023, the proceeds will need to be apportioned. The balancing charge is being tapered down to 100% by 31 March 2024.

Super Deduction Example

A company buys a piece of new machinery for £200,000 on 1 May 2021. As the company has invested in new qualifying plant and machinery, they will be able to claim the new super deduction of 130%.

The company will be able to claim capital allowances of £260,000 (£200,000 x 130%) which will be deducted from their taxable profit for the year. The company will receive corporation tax relief of £49,400 (£260,000 x 19%) on this capital expenditure.

Under the old rules, assuming the company has sufficient annual investment allowance (AIA) available the same expenditure would have resulted in corporation tax relief of £38,000
(£200,000 x 19%). By claiming the super deduction the company will receive an additional
£11,400 (£60,000 x 19%) tax relief on the investment in plant and machinery.

The company later decides the machinery is not working as required and makes the decision to sell it on 31 December 2022 for £150,000.

As the company have claimed the new super deduction on this asset a balancing charge will arise of £195,000 (£150,000 x 1.3). This balancing charge will be added to the company’s taxable profit for the year and increase the company’s tax liability by £37,050 (£195,000 x 19%).
The balancing charge in effect claw backs the additional tax relief the company has claimed on the asset.

Tax planning ideas

As with many new reliefs, the introduction of the super deduction gives rise to a few tax planning ideas that your company may wish to consider:

1) Allocation of special rate expenditure

As noted above, expenditure incurred on special rate pool assets will qualify for a 50% first year allowance (FYA) for the two-year period from 1 April 2021.

However, it may be more beneficial to claim AIA on this expenditure as the company will receive 100% tax relief, assuming that the company has sufficient AIA available.

The AIA limit is currently £1m however it is expected to reduce to £200,000 with effect from 1 January 2022, meaning the 50% FYA may become more attractive after this date. Also, companies which are part of a group or have exceeded the AIA limit could make use of the 50% FYA compared to the previous WDA of 6%.

2) Expected increase in corporation tax from April 2023

Also announced in the 2021 budget an increase in corporation tax from the current rate of 19% to 25% with effect from April 2023. This measure will also see the return of marginal rates of corporation tax.

It is thought that the super deduction has been designed so that companies receive the same tax relief now that they would if they purchased the equipment after April 2023 and received tax relief at the higher rate of 25%.

However, the AIA limit is expected to be only £200,000 at this point so your company may want to look at bringing forward capital investments to benefit from the extra relief now.

3) Interaction with taxable losses

The last announcement made during the 2021 budget was an extension to the loss carry back rules. If a company has a loss arising in an accounting period between 1 April 2020 to 31 March 2022 they will now be able to carry that loss back for up to three years.

The company would need to consider whether it would be more beneficial to carry a loss back and receive a tax refund quicker or carry the loss forward and potentially receive tax relief at the new higher rate of 25%.

If you are planning on making large investments and are unsure whether you would qualify for the new relief or want to discuss the potential tax relief you would receive, please get in touch with a member of our team.