Super Deductions for Capital Expenditure
Updated: May 5, 2021
Today’s budget announced a temporary increase in tax relief for companies who invest in certain types of new plant and machinery between 1 April 2021 and 31 March 2023. The headline sounds great but as ever when it comes to tax, the devil is in the detail and not everyone, or all types of expenditure is going to benefit in the same way.
Significantly, leased and long life assets [See Note 1 below] are excluded which means commercial property landlords are going to be significantly restricted without further modification. The capital expenditure must be new (not used or second hand) and further details are below.
Capital allowances allow businesses to write off the costs of tangible capital assets, such as plant or machinery, against their taxable income. They take the place of commercial depreciation, which is not an allowable tax deduction.
First-year allowances allow enhanced rates of relief for certain plant and machinery investments, providing claims are made in the period the expenditure is incurred. The super-deduction is an enhanced first-year allowance providing an allowance exceeding the cost of the asset.
General Plant and Machinery
Instead of an 18% writing down allowance, companies subject to corporation tax (CT) will be allowed to deduct 130% of the qualifying expenditure involved. This means an immediate potential tax saving of 19% plus 5.7% (for the enhanced portion) resulting in an overall cash tax saving of 24.7% of the qualifying expenditure involved.
General ‘main pool’ plant and machinery includes most loose plant, machinery, and equipment that a business might need to use in their trade (e.g., furniture, catering equipment, computers, cranes, and diggers etc.) as well as certain fixtures installed in structures or buildings (e.g., CCTV, kitchens, fire alarms, sanitary ware etc.).
Special Rate Pool Plant and Machinery
Instead of a 6% writing down allowance, companies subject to CT will be allowed to deduct a 50% first year allowance (FYA), a significant accelerated timing benefit.
Examples of ‘special rate pool’ expenditure include: - lifts, escalators and moving walkways; space and water heating systems; air-conditioning and air-cooling systems; hot and cold-water systems (but not toilet and kitchen facilities); electrical systems, including lighting systems; external solar shading; certain long-life assets; and solar panels.
Today’s budget also confirmed the previously trailed extension of the £1 million Annual Investment Allowance (AIA) to 31 December 2021 which can be used for either special rate or main pool plant and machinery.
Both the super deduction of 130% and enhanced deduction of 50% will fall within the existing FYA provisions which are subject to several restrictions, the most significant of which are cars, leased assets and long-life assets (LLAs).
The leasing exclusion is particularly wide and will result in landlords being ineligible, as well as other businesses who lease qualifying assets as part of their trade (e.g., software acquired for licensing or sub-licensing).
The LLA exclusion will impact large infrastructure projects and manufacturers who install plant or machinery with a potential useful life of at least 25 years from new (e.g., power utilities, water treatment, ‘big-ticket’ machinery and established renewables). The LLA rules do not affect assets installed or used for the purposes of a dwelling house, retail shop, showroom, hotel or office.
Connected Party Restrictions
As with other types of FYAs’, companies with Hold Co. or Development structures, where the trading company invoices the assets, will need to take extra care to avoid the ‘connected party’ restrictions which can remove entitlement to both FYAs and AIAs.
New Disposal Rules
Amendments will be made 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. The calculation includes rules which treat only part of the disposal receipt as a balancing charge, if part of the original expenditure is claimed by these temporary allowances, or part is claimed by other capital allowances.
Further, for assets that have been claimed under the super-deduction, the disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3, except where disposals occur in accounting periods straddling 1 April 2023, resulting in a factor lower than 1.3. This rule does not apply to the 50% first-year allowance for special rate expenditures.
Given that tax computations do not typically track capital allowances claims on an asset basis once the initial claim has been made, companies will need to keep more accurate records to track claims for the above disposal calculations.
Legislation will be introduced in the Finance Bill 2021 to amend Part 2 CAA 2001 to bring in the super-deduction, an enhanced temporary 130% first-year allowance for main rate assets, and a 50% first-year allowance for special rate assets.
If you would like further details on the above, please do not hesitate to contact us.
HMRC have since confirmed they will accept the recent decision in DAARASP LLP and BETEX LLP  UKFTT0548 (TC) as it relates to Long Life Assets for the purposes of CAA 2001 s46(2) - General Exclusion 5.