Super-deduction relief – investment deadline looming

Expenditure on eligible new and unused plant and machinery incurred between 1 April 2021 and 31 March 2023 by limited companies is eligible for a 130% super-deduction first year allowance

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These assets are individually identified and tracked and do not enter the main or any other ‘capital allowances’ pool. This is because special rules apply when they are subsequently sold or disposed of (see below). Enhanced super-deduction reliefs are now available for certain investments.

From 1 April 2023, companies may be eligible to claim normal capital allowances (18%/6%) and Annual Investment Allowance (AIA) up to its permanent limit set to £1m on plant and machinery.

What is super-deduction relief?

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest. Investing companies will also benefit from a 50% first-year allowance (FYA) for qualifying special rate (including long life) assets.

What are qualifying expenditures?

Companies can claim in the period of investment:

  • a super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing-down allowances
  • a FYA of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing-down allowances.

Capital investment must be in new and unused assets that qualify as main pool expenditure, subject to some specific exclusions. This will include expenditure such as solar panels, tractors, lorries and vans, fire alarm systems, security systems, carpets, computer equipment and servers, office desks and furniture, refrigeration units and electric vehicle charging points.

More details are included within Finance Bill 2021 to amend Part 2 CAA 2001.

Are any expenses excluded from claiming the super deduction?

Yes, certain expenditures will be excluded. The general exclusions at s46 will apply.

No deduction is available for used and second-hand assets and expenditures on contracts entered prior to 3 March 2021 even if expenditures are incurred after 1 April 2021.

Assets used wholly within a ring-fence trade will be excluded from the super-deduction, as they already have a 100% allowance, with assets used partly in a ring-fence trade temporarily qualifying for a 100% FYA.

Plant and machinery expenditure which is incurred under a hire purchase or similar contract must meet additional conditions to qualify for the super-deduction and special rate relief. These conditions are specified within CTA 2010 section 1129.

No deduction is allowed:

  • if expenditure is incurred in the chargeable period in which the qualifying activity is permanently discontinued
  • on cars
  • on building and structures (excluding integral features)
  • on expenditure excluded from long-life asset treatment by the ‘grandfathering provisions’
  • on expenditure on the provision of plant and machinery for leasing. Landlords, including property owning companies which lease property to other members of the same group, will not be able to benefit from the super-deduction. Landlords can still claim the annual investment allowance or writing down allowances where appropriate
  • if claiming the super-deduction is incurred in connection with a change in the nature or conduct of a trade of business carried on by a person other than the person incurring the expenditure (only if claiming the super-deduction is one of the main benefits expected to arise from the change).

How to calculate super-deduction

The rate of the super-deduction will require apportioning if an accounting period straddles 1 April 2023. The rate should be apportioned based on days falling prior to 1 April 2023 over the total days in the accounting period.

Apart from the enhanced expenditure, another positive aspect of the super-deduction is that there is no cap, unlike with AIA. It is possible to bring forward the financial year end of the company to benefit from the greater corporation tax savings earlier. On the other hand, companies planning to invest nearer to 31 March 2023 may want to delay the spend to get the higher corporation tax rate savings which will be 25% CT rate, applicable from 1 April 2023.

Is there any clawback on the disposal of the assets where super-deduction is claimed?

Yes, amendments will be made to Chapter 5 to bring in new disposal rules that will apply to assets that have been claimed to these allowances. Disposal receipts should be treated as balancing charges (taxable profits), instead of being taken to pools.

If the disposal takes place before 1 April 2023, a special balancing charge calculation is needed for assets on which the super deduction was previously claimed: in simple terms, the disposal value for the year of sale is 1.3 times the sale proceeds of the asset. Where a chargeable period commences before 1 April 2023 and the disposal takes place after 1 April 2023 within that chargeable period a factor based on the number of days before/after the relevant date is required. For any disposals for chargeable period that commences after 1 April 2023 the factors does not apply. Considerations are also required in relation to disposals of assets that have qualified for the SR allowance.

If the relevant amount is less than the total disposal value for the item, then the remaining amount of the disposal value is taken to the main rate pool.

Are there any anti-avoidance rules?

Yes, an anti-avoidance provision applies to counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose and existing rules at Chapter 17 apply, including the exclusion of connected party transactions from FYAs. Contracts already in place cannot be cancelled and then put into place again after 31 March 2021 with a view to achieving the new super-deduction.

Are there any exceptions for manufacturers and suppliers?

Section 217 of CAA 2001 prohibits FYA if the relevant transaction happens by virtue of:

  • s214 (connected companies)
  • s215 (transactions to obtain tax advantage)
  • s216 (sale and leaseback etc).

However, s230 provides exceptions for the above restrictions for manufacturers and suppliers. The conditions should be:

  • the relevant transaction is within s213(1)(a) or (b)
  • the case does not fall within s215
  • the plant or machinery has never been used before the sale or the making of the contract
  • S’s business, or part of S’s business, is the manufacture or supply of plant or machinery of that class
  • the sale is effected or the contract made in the ordinary course of that business.

Do assets on hire purchase or finance lease qualify for the super-deduction?

Two types of leases are recognised for accounting purposes: finance leases and operating leases. Finance leases are typically leases for most or all of an asset’s useful life and in commercial terms are equivalent to a loan. Operating leases are usually the simple hire of an asset for a short part of its useful life.

  • Hire purchase: yes, assets on hire purchase and similar contracts, where possession of plant and machinery transfers to the acquirer but not the ownership, super-deduction may be claimed – 130% for main rate plant and machinery and 50% for special rate expenditure. Capital allowances can only be claimed on all payments due to be made under the HP agreement when the asset has been brought into use.
  • Finance lease: special rules apply to assets acquired for leasing out under a finance lease. There are no FYAs available. A finance lease is an arrangement or arrangements that under generally accepted accountancy practice in the UK would fall to be treated as a finance lease or a loan in the accounts or consolidated accounts of the lessor or any person connected with the lessor – s219 of CAA 2001.

Should businesses consider incorporating to claim super-deduction?

Super-deduction is not available to partnerships and sole traders. Businesses which are considering making a substantial investment may consider incorporating but the decision should be driven on commerciality rather than taxation. Furthermore, one must not forget that the rate of corporation tax is increasing from 19% to 25% from 1 April 2023.

Where can I find more information for super-deduction?

What’s more…

Additionally, one of the other important changes for corporate clients to watch out for this year is the reforms announced to the Research and Development Tax Reliefs effective from 1 April 2023. ACCA wrote to members for their comments on these proposed changes and we are in the process of replying to HMRC with our members’ feedback which will be sent by 13 March 2023.