Frequently Asked Business Question:
I have heard that the Chancellor announced a new Super Deduction Allowance for Capital Expenditure in his recent Budget. What is this relief and how does it differ from existing Capital Allowance reliefs?
In his recent March Budget, Chancellor Rishi Sunak announced that the UK rate of Corporation Tax was going to have to increase significantly from the current level of 19% to a new level of 25% with effect from 1 April 2023. Therefore, companies have two years to prepare for this tax increase. Those companies that are contemplating significant capital expenditure on new plant and machinery might therefore decide to defer their expenditure plans until after March 2023 so that they will get tax relief at 25% instead of 19%. Mindful of this, the Chancellor has announced a Super Deduction First Year Allowance (SD FYA) which will complement the existing Annual Investment Allowance (AIA). AIA enables 100% tax relief on the first £1m of capital expenditure and has been extended until 31 December 2021.
How the SD FYA works, is that it treats the company as having spent 30% more on the capital expenditure than it actually has spent. Therefore, if a company buys a piece of equipment for £100k, it is treated as having spent £130K. If you multiply £130k X 19%, it equates to approximately £25k of tax relief, and therefore by investing in plant and machinery now, the company is getting virtually the same tax relief as it would were it to defer its expenditure plans until April 2023. This is why the SD FYA has been introduced and it is only available to companies and not the self-employed.
As usual, nothing in the tax world is ever straightforward. The plant and equipment on which SD FYA has been claimed must be separated within the company’s taxation computation and tracked individually as there is a clawback of the allowance on disposal and the amount of the clawback depends on when the plant and machinery is sold. If it is bought and sold in the two-year period 31 April 2023, the disposal proceeds are increased by a notional 30%. If it is sold after 31 March 2024, the proceeds are the actual proceeds received. This means that this headline-grabbing allowance may be significantly reduced in value given the complex disposal clawback rules. This would be particularly relevant for equipment with a short economic life.
The SD FYA can only be claimed for the purchase of new and unused assets and the normal date of deemed capital allowance expenditure applies, namely the date upon which there is an unconditional obligation to purchase the plant and equipment unless the actual payment date is more than four months after this date. Given the fact that many businesses acquire refurbished or second-hand equipment, this is how the AIA interacts with the SD FYA as plant and equipment incapable of qualifying for the SD FYA on the grounds that it is refurbished, can be claimed under the AIA rules up to 31 December 2021. Motor cars do not qualify for the SD FYA however, vans and lorries do and as the SD FYA is unlimited in terms of value (unlike the AIA which is capped at £1m), it is likely that businesses that have significant capital expenditure such as haulage companies are likely to replenish their fleets over the next two years.
For more information and/or assistance, please contact our Tax Team who will be pleased to help you.