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Budget 2021 - The "Super Deduction"

SUPER DEDUCTION - EXTRA 30% ALLOWANCE ON BUYING PLANT

Announced in the 3 March budget, the Super Deduction is a temporary tax relief designed to encourage companies to invest in plant and machinery over the next 2 years. In brief, tax relief will be given to the value of 130% of qualifying expenditure rather than the current maximum of 100%.

There are a number of qualifying conditions however and a sting in the tail if/when the plant and machinery is later sold. We've set out the key points below:

  1. The first key point is that this is only available for businesses carrying out trading activities via a limited company. Partnerships and sole traders are not eligible for this deduction.
  2. The second key point is that the plant etc must be brand new, not used or second-hand.
  3. Qualifying plant includes commercial vehicles but not cars, can't be used in a leasing activity and mustn't be an asset that would fall into the special rate pool for capital allowances (for example electrical systems incorporated into a building).
  4. The deduction is available on expenditure incurred between 1 April 2021 and 31 March 2023.
  5. The asset must have been ordered on or after 3 March 2021; if your asset arrives and is paid for after 31 March 2021 but was ordered before 3 March then it will not qualify.

Currently most small companies (and sole traders and partnerships) buying plant will be able to use the 100% Annual Investment Allowance, which is set at £1m per annum up to 31 December 2021. There is no cap on the super deduction, although for small businesses the cap isn't really an issue at present. The effect of the deduction is significant however.

For example if a company purchases assets for £50,000 after 1 April the effect will be a £65,000 reduction in taxable profits for the company's accounting period. The extra £15,000 of relief will equate to a tax saving (or potential repayment if a tax loss is created which can be used against a prior year) of £2,850. This is at the current small company tax rate of 19% (£15,000 x 19% = £2,850).

DISPOSING OF ASSETS ON WHICH SUPER DEDUCTION WAS CLAIMED

The sting in the tail mentioned above comes when the asset is disposed of in a later year. When an asset on which super deduction was claimed is subsequently sold then it will generally have to account for proceeds equal to 130% of the sale value. This effectively gives back the benefit of the extra 30% on the value the company receives for selling the plant. For example if the £50k plant from the example above was sold for £25k in 2024 then effectively this is treated as a sale at £32,500 (£25,000 x 130%) and the extra £7,500 gives rise to a tax charge of £1,425.

This however assumes that the small company tax rate of 19% still applies. If the company's profits in the year of disposal exceed £50,000 then the tax rate will be more than 19%, and the extra deemed proceeds are likely to help push the tax rate up. For example if the company is subject to the 25% rate (profits over £250k) then this will equate to extra tax to the tune of £1,875. Thus the purchase will have been given tax relief at 24.7% (130% x 19%) but the disposal will be taxed at 32.5% (130% x 25%).

In this scenario the benefit of the extra £2,850 received on purchase is significantly reduced. The super deduction will still generate a saving but in circumstances where assets are likely to be sold then there will be payback later on. Decisions to sell assets in later years will for a time be accompanied by the question "did we claim the super deduction on this?" and when companies are sold, the buyers will need to bear this in mind.

THE SUPER DEDUCTION AND LOSSES CARRIED FORWARD

If a company incurs tax losses in 2021/22 or 2022/23 which are enhanced by the super deduction, and the losses are carried forward for offset in 2023/24 or later, then the loss relief could effectively be at the new corporation tax rate, depending on the level of profits in that later year.

In our example above, if an item is purchased for £50k in 2022/23 and the deduction enhances or creates a loss carried forward by £65k which is then offset against profits in 2023/24, then it's possible that the relief will be at 25%, with the tax saving on the extra £15k amounting to £3,750 (as opposed to £2,850 at the 19% rate). This will require a particular set of circumstances but businesses that need to invest from time to time in very significant one-off purchases but which have good underlying profits may be able to plan ahead to take advantage.

FIRST YEAR ALLOWANCE FOR SPECIAL RATE ASSETS

We mentioned above that assets that would be allocated to the special rate pool wouldn't qualify for the super deduction. To encourage such spending the government have allowed a 50% First Year Allowance for these assets.

For many small companies however they will be able to use the 100% Annual Investment Allowance for these additions so the FYA will more likely be claimed by larger companies.

April 05, 2021

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