‘Bold and unprecedented’. That was the Chancellor’s description of the new 130% super deduction for plant and machinery announced in the Budget. But, when you look at the detail, how does it really stack up against the usual rules on capital allowances?
The headline stats were certainly impressive; the new 130% super deduction would reward businesses with a tax cut of 25p for every pound invested in new plant and machinery. Sounds great, doesn’t it? So, what are the catches?
The super deduction small print
First of all, the super deduction is not available to every business. It is strictly available to companies, not unincorporated businesses. These will have to continue to look to the Annual Investment Allowance (AIA) for tax relief on capital spending. The AIA threshold has been temporarily increased to £1 million until 31 December 2021.
It is only temporary, for two years. The super deduction works by giving first-year tax relief in the form of capital allowances for expenditure between 1 April 2021 and 31 March 2023. For assets that would normally qualify for 18% main rate writing down allowances, the super deduction gives first-year relief of 130%. Assets that normally qualify for 6% special rate writing down allowances (such as integral features in buildings, like electrical and lighting systems) can qualify for a first-year allowance of 50%. However, this 50% allowance is likely to be relevant only to companies that have used their AIA. Unlike the AIA, there is no cap on eligible expenditure. The rate of the deduction will be apportioned for a company with eligible expenditure in an accounting period that straddles 1 April 2023.
There are exclusions. Plant or machinery must be new. It cannot be used or second-hand. Expenditure incurred on contracts entered into before the Budget on 3 March 2021 will not qualify.
The general exclusions to first-year allowances in existing legislation still apply. Expenditure on cars, and assets for leasing, for example, are excluded. This latter restriction means commercial landlords may benefit less than they might have expected from the initial publicity.
Rules on the disposal of assets make the picture more complex. Disposal proceeds will be treated as a taxable balancing charge, which will potentially claw back some of the previous benefits. It will be important to keep records of which assets the super deduction was applied to so they can be correctly treated on sale.
Will the super deduction benefit your business?
Not in every case. As it sits alongside other tax measures, it will be a finely balanced equation.
The deduction is designed to incentivise investment now, with the corporation tax rate at 19%. But the planned increase in corporation tax from 1 April 2023, when the super deduction ends, may change the outlook for your business. The main rate of corporation tax is set to increase to 25% on profits over £250,000, with only companies with profits up to £50,000 retaining the 19% rate. Companies with profits between £50,000 and £250,000 will be taxed on a sliding scale.
There are many factors that will determine just how much the super deduction benefits your company, including the forecast level of capital expenditure; the type of asset; financing method, and your expected corporation tax rate.
With the AIA due to go back down to £200,000 from next January, and higher corporation tax rates on the horizon, careful timing of major capital expenditure is more critical than ever. If you would like advice on the best time to invest in plant and machinery for your business, please speak to your RfM advisor. Contact them via your local office page or enquire online.