Capital Allowances & the Super-Deduction

The Super Deduction

This is only available to companies for expenditure incurred on NEW qualifying assets from 1 April 2021 until the end of March 2023. It gives a 130% first-year deduction on qualifying main rate plant and machinery investments.

There is also a 50% first-year allowance (FYA) for special rate (including long life) assets.

Example one

• A company incurring £1m of qualifying expenditure decides to claim the super-deduction.
• Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits.
• Deducting £1.3m from taxable profits will save the company up to 19% of that – or
• £247,000 – on its corporation tax bill.

Example two (Comparison with previous system)

A saving of almost £2m!

Things to watch out for

Exclusions

• Certain expenditure (under normal capital allowance rules) will be excluded.
• Used and second-hand assets.
• Expenditure on contracts entered into prior to 3 March 2021, even if expenditure is incurred after 1 April 2021.
• Plant and machinery expenditure incurred under a Hire Purchase or similar contract must meet additional conditions to qualify.

Rate

• 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.

Disposals

• New disposal rules will apply to assets that benefit from these allowances.
• Disposal receipts will be treated as balancing charges (taxable profits), instead of being taken to pools.
• If only a proportion of the cost benefited from the claim, the same proportion will be treated as a balancing charge.
• The disposal value of assets that benefit from the super-deduction, will be adjusted upwards by 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.

Anti avoidance

• Anti-avoidance provisions exist to counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose.
• Connected party transactions are also excluded from first-year allowances.

Annual Investment Allowance

Remember that the Annual Investment Allowance, which is available to sole traders, partners and companies, provides 100% relief for plant and machinery investments up to £1 million until 31 December 2021. Please note that this limit reverts to £200,000 from 1 January 2022.

Freeports

Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026.