{"id":1968,"date":"2021-04-28T14:51:40","date_gmt":"2021-04-28T14:51:40","guid":{"rendered":"https:\/\/srcadvisory.com\/?p=1968"},"modified":"2021-04-28T14:51:42","modified_gmt":"2021-04-28T14:51:42","slug":"super-deduction","status":"publish","type":"post","link":"https:\/\/srcadvisory.com\/super-deduction\/","title":{"rendered":"Super Deduction"},"content":{"rendered":"\n

What is the super deduction?<\/strong> <\/p>\n\n\n\n

On 3 March 2021, the Chancellor announced a temporary change to tax relief which allows companies to claim enhanced capital allowances on qualifying plant and machinery assets. This new relief will allow companies to save up to 24.7p in corporation tax for every \u00a31 of investment in plant and machinery in the year of expenditure.<\/strong> <\/p>\n\n\n\n

The tax relief is available on qualifying expenditures incurred from 1 April 2021 up to and including 31 March 2023.  Any contracts entered into before 3 March 2021 will not be eligible for super deduction regardless if expenditures are incurred post 31 March 2021. Whilst the existing rules regarding the timing of expenditures for capital allowances purposes have not changed, companies will need to consider the timing of expenditure carefully in order to determine whether they will qualify. <\/p>\n\n\n\n

Subject to some exclusions, the enhanced relief is given by way of a First Year Allowance (\u201cFYA\u201d) at the relevant percentage for the asset type.  The percentages are as follows:- <\/p>\n\n\n\n

Percentage of FYA<\/strong> <\/td>Known as<\/strong> <\/td>What assets qualify<\/strong> <\/strong> <\/td>Examples of such asset<\/strong> <\/td><\/tr>
130% <\/td>“Super deduction”<\/em> <\/td>Assets which qualify for plant and machinery allowances, ordinarily at 18% <\/td>Computer equipment, vans, office equipment <\/td><\/tr>
100% <\/td>\u202f <\/td>Assets which qualify for plant and machinery allowances, used partly in a ring fence business and partly in another qualifying business <\/td>Computer equipment or machinery used for extracting oil & gas that are used in a ring fence business <\/td><\/tr>
50% <\/td>\u201cSpecial rate allowance\u201d<\/em> <\/td>Assets which qualify for capital allowances at the lower rate of 6% (special rate assets) <\/td>Solar panels electrical and lighting systems, cold water systems, lifts <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

*50% of the cost can be claimed as a First Year Allowance, with the remaining 50% of the cost attracting 6% Writing Down Allowances on a reducing balance basis. <\/p>\n\n\n\n

The temporary measure has been designed to encourage capital investment in the UK. <\/p>\n\n\n\n

What assets will not qualify for this tax relief?<\/strong> <\/p>\n\n\n\n

Not all plant and machinery will qualify for this tax relief.\u202f The exclusions are set out in the following table:- <\/p>\n\n\n\n

Plant or machinery<\/strong> <\/td>130% super deduction<\/strong> <\/td>100% ring fence trade allowance<\/strong> <\/td>50% special rate allowance<\/strong> <\/td><\/tr>
Cars <\/td>X <\/td>X <\/td>X <\/td><\/tr>
Long life assets (>25 year life when new) <\/td>X <\/td>X <\/td>X <\/td><\/tr>
Plant or machinery acquired for leasing <\/td>X <\/td>X <\/td>X <\/td><\/tr>
Second-hand assets <\/td>X <\/td>X <\/td>X <\/td><\/tr>
Assets purchased where there is a change in the nature or conduct of the trade or business and the main purpose is to benefit from this tax relief <\/td>X <\/td>X <\/td>X <\/td><\/tr>
P&M used partly for a qualifying activity and partly for other purposes, or the re-use of assets previously used for long funding leasing, or gifted P&M <\/td>X <\/td>X <\/td>X <\/td><\/tr>
Special rate expenditure <\/td>X <\/td>X <\/td>\u202f <\/td><\/tr>
Main plant or machinery <\/td>\u202f <\/td>\u202f <\/td>X <\/td><\/tr>
Plant or machinery intended wholly or partly for a ring fence trade <\/td>X <\/td>\u202f <\/td>\u202f <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Who is eligible to claim the enhanced capital allowances?<\/strong> <\/p>\n\n\n\n

Companies which are within the charge to UK Corporation Tax are eligible to claim the enhanced capital allowances on qualifying plant and machinery assets. <\/p>\n\n\n\n

Partnerships and unincorporated businesses will not be eligible to claim the new FYA rates however they are still entitled to claim the annual investment allowance. <\/p>\n\n\n\n

How does this new enhanced deduction interact with the existing Annual Investment Allowance?<\/strong> <\/p>\n\n\n\n

The annual investment allowance (\u201cAIA\u201d) will remain at \u00a31m for the period from 1 January 2021 \u2013 31 December 2021. There is no limit to expenditure to which the FYA for the period from 1 April 2021 to 31 March 2023 may apply. <\/p>\n\n\n\n

The new enhanced deduction is\u202fin addition<\/strong>\u202fto the existing AIA therefore companies may be eligible to claim both the AIA and the new FYA. This can create an attractive cash advantage for many companies who are planning on investing in plant and machinery however careful consideration must be given to what tax relief to claim. <\/p>\n\n\n\n

Companies who are planning on investing in plant and machinery of more than \u00a31m in the next few years should consider taking advantage of the super deduction by bringing expenditure forward and incur the costs on or before 31 March 2023. <\/p>\n\n\n\n

When the corporation tax rate of 25% applies from 1 April 2023, the tax deduction for expenditure qualifying for capital allowances will also be 25p for every \u00a31 invested, but without the benefit of a first year allowance or such a generous AIA, it will be obtained over time and not in one year. <\/p>\n\n\n\n

Examples of how this tax relief will work<\/strong> <\/p>\n\n\n\n

Example 1:<\/strong> <\/p>\n\n\n\n

A company purchases new equipment (a qualifying asset) on 30 June 2021 costing \u00a35m.<\/em> <\/p>\n\n\n\n

Tax relief under the \u201cold\u201d rules<\/strong> <\/td>Tax relief under the super deduction<\/strong> <\/td><\/tr>
Maximum AIA available <\/td>\u202f\u00a31m <\/td>Super deduction claim (\u00a35m@130%)\u202f \u202f \u202f \u202f \u202f \u202f\u202f <\/td>\u00a36.5m<\/strong> <\/td><\/tr>
Writing down allowances (\u00a34m@18%)\u202f \u202f \u202f \u202f <\/td>\u00a30.72m <\/td>\u202f <\/td>\u202f <\/td><\/tr>
TOTAL Capital allowances in year 1\u202f<\/strong> <\/td>\u00a31.72m<\/strong> <\/td>TOTAL Capital allowances in year 1<\/strong> <\/td>\u00a36.5m<\/strong> <\/td><\/tr>
Tax saving at 19% in year 1<\/strong> <\/td>\u00a30.33m<\/strong> <\/td>Tax saving at 19% in year 1<\/strong> <\/td>\u00a31.24m<\/strong> <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

As a result of the super deduction, a company can save c\u00a3910,000 in corporation tax in the year of purchase in this example. <\/p>\n\n\n\n

Example 2:<\/strong> <\/p>\n\n\n\n

A company purchases new solar panels (a special rate asset) on 30 June 2021 costing \u00a35m<\/em> <\/p>\n\n\n\n

Tax relief under the \u201cold\u201d rules<\/strong> <\/td>Tax relief under the special rate allowance<\/strong> <\/td><\/tr>
Maximum AIA available <\/td>\u202f\u00a31m <\/td>Special Rate allowance\u202f (\u00a35m@50%)\u202f \u202f \u202f \u202f <\/td>\u00a32.5m <\/td><\/tr>
Writing down allowances (\u00a34m@6%)\u202f \u202f\u202f <\/td>\u00a30.24m <\/td>Maximum AIA available\u202f <\/td>\u00a31m <\/td><\/tr>
TOTAL Capital allowances in year 1\u202f<\/strong> <\/td>\u00a31.24m<\/strong> <\/td>TOTAL Capital allowances in year 1<\/strong> <\/td>\u00a33.5m<\/strong> <\/td><\/tr>
Tax saving at 19% in year 1<\/strong> <\/td>\u00a30.24m<\/strong> <\/td>Tax saving at 19% in year 1<\/strong> <\/td>\u00a30.67m<\/strong> <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

As a result of the special rate allowance, a company can save c\u00a3430,000 in corporation tax in the year of purchase in this example. <\/p>\n\n\n\n

In both the examples, where no FYA is claimed there would be capital allowances available in future years. <\/p>\n\n\n\n

Benefits of this tax relief<\/strong> <\/p>\n\n\n\n