In a bid to stimulate business investment the Chancellor announced a temporary capital allowances ‘super deduction’, for companies, in his Spring Budget. In the weeks since, we have received a number of queries from clients wanting to know exactly what it is, how it works and if their business can benefit.
What is the ‘super-deduction’ for capital allowances?
Companies who have qualifying expenditure on tangible assets (i.e. plant and machinery), in the period from 1st April 2021 through to 31st March 2023, can claim a ‘super-deduction’ of 130% on this. What is more, there is no upper limit to the amount of expenditure that can qualify.
This is expenditure that would otherwise have qualified for the Annual Investment Allowance (AIA) or the 18% main rate Writing Down Allowance (WDA). There is also a 50% first-year allowance on new plant and machinery, that would have qualified for the special 6% pool.
How does the ‘super-deduction work?
In layman’s terms, the ‘super-deduction’ will give companies only the ability to offset the total cost, plus an additional 30%, of new equipment against tax. Importantly, unlike some of the other deductions available, this one is much more proximate.
A companies qualifying expenditure on plant and machinery totals £1m.
It can deduct £1.3m (130% of the investment) when calculating taxable profits.
The company saves £247,000 on its Corporation Tax bill (19% of £1.3m).
The Government’s concern was that, without the ‘super-deduction’, companies would hold off on investments until the higher rate of Corporation Tax comes in, hence reducing the profit to be taxed at 25%.
The hope is that this new incentive will bring investment plans forward, offset the impact of the planned rate increase, and see companies enjoying improved profitability and productivity ahead of the changes.
What does the ‘super-deduction’ really mean for my business?
There is little doubt that the ‘super-deduction’ is an attractive measure for companies with either short-term or long-term investment plans.
As is often the case with new legislation, the devil is in the detail. A few things to be wary of include:
- Hire purchase arrangementsHire purchase arrangements can be considered qualifying expenditure, if payments are made with the intention of the ownership of the asset passing to the claimant.
- Potential clawback on disposal of assetsClaimants should consider that, where the 130% has been claimed and the asset is disposed of before the end of the regime, there will be clawback and in doing so could end up costing you more than the deduction was originally worth.
- Timing of investmentTransitional rules apply for companies that do not have a March year end, and so the allowance will be time apportioned.Aside from this, careful consideration should be given to the timing of investments more generally. For example, if you have an investment lined up for March 2021, you may wish to defer until after 1st April 2021 and if you have a longer-term investment plan, you may wish to bring investment forward to take advantage of the ‘super-deduction’.
- Amount and nature of expenditureIt’s important not to assume that you should be claiming the super-deduction, simply because it is available.The amount you are planning to invest, the nature of your expenditure and the period your investment plans span should all be taken into consideration when deciding what to claim.
In some instances, it may make sense to stick with your existing plans, whilst in others it may be beneficial to accelerate them; especially when you take into account that the AIA is due to drop from £1m, to £200,000 on 1 January 2022.
How can George Hay help?
Clearly, the super-deduction was one of the most noteworthy announcements to come out of the Budget and companies are keen to know what, if anything, this changes for them.
If you have investment plans that you think could qualify for the new allowance, we encourage you to contact your usual George Hay adviser who will be able to discuss with you what the implications are for your organisation.
If you don’t currently have the support of an accounting professional or business adviser, contact one of our three offices in Cambridgeshire, Bedfordshire or Hertfordshire to find out more about how we could work with you.
You can read more about the ‘super-deduction’ and the other key Budget announcements in our 2021 Spring Budget Summary.