• Date

    23 Apr 2021
  • Category

    Tax, Capital Allowances, Corporate Tax

How will the Chancellor’s Super Deduction work?

The recent spring Budget provided a somewhat unexpected boost for companies planning to invest in new assets with the introduction of what Rishi Sunak called “Super Capital Allowances”.

The new allowances are available for a two-year period ahead of the planned increase in corporation tax in 2023, when the headline rate will rise from 19% to 25%.  As a government policy, the message is clear: Invest in the next two years to kick-start the economic recovery after COVID and take advantage of the enhanced tax reliefs, before the hike in corporation tax in 2023.

These new allowances are in addition to the existing Annual Investment Allowance (AIA) which, until 31 December 2021, permits 100% relief for up to £1m of expenditure on qualifying plant and machinery assets.

For the next two years, the Super Deduction (see below) effectively reduces the capital cost of a qualifying asset by 25%, a welcome measure for companies looking to invest. However, the new measures have also drawn criticism from some quarters who point out that super allowances are available to companies only and expenditure incurred under contracts entered into before 3 March 2021 is also excluded. Under these exclusions, many businesses will be unable to benefit from the enhanced allowances. As always, at first glance, the headlines are eye catching. However, close scrutiny of the legislation is required to ensure the relevant criteria are met to claim super allowances.

Who can claim?

The new allowances are only available to companies and can be claimed for qualifying expenditure incurred between 1 April 2021 and 31 March 2023. 

Exclusions

  • Sole traders, partnerships and LLPs.
  • Expenditure incurred under a contract entered into before 3 March 2021.
  • Not available for second-hand assets.
  • Landlords – The new reliefs are to be introduced as enhanced First Year Allowances and will therefore not be available to landlords who lease property to tenants. 

Super Allowances

  • The Super Deduction – A new 130% first year allowance for expenditure on main pool qualifying assets such as machinery, furniture, fittings, computers etc.  Previously relief was at 18% per annum.
  • Enhanced Special Rate – A new 50% first year allowance for Special Rate assets including integral features in buildings such as electrical, water and heating systems.  Previously relief available at 6% per annum.

Issues to be aware of

  • Disposal proceeds for the sale of assets where Super Allowances have been claimed will be taxed in full as a balancing charge.
  • Any sale of a Super Deduction asset before 31 March 2023 will be subject to an enhanced disposal value calculated by a multiple of 1.3.  A tapered multiple is then applied to disposals in accounting periods which straddle 1 April 2023.
  • Any sale of an Enhanced Special Rate asset will trigger a balancing charge equal to 50% of the disposal value.

What next?

Business owners should look carefully at the timing of planned investment in new assets to take full advantage of the enhanced allowances. Up to 31 December 2021, the additional tax savings through Super Allowances will be most beneficial to companies that have already absorbed the 100% relief available through the AIA.  It will be interesting to see if the planned reduction in the AIA to £200,000 in 2022 is actioned or whether a more generous allowance continues. The AIA is available to all businesses, partnerships and individuals and therefore has wider appeal if the Government is looking to incentivise investment to sustain a post-COVID recovery.

For further information on the areas raised in this insight, or to discuss in more detail, please speak with your usual Azets contact or a member of our tax team.

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