An introduction to Super Deduction

By Malcolm McGready, Ensors Chartered Accountants
The Spring Budget gave businesses several valuable new reliefs, to help cashflow and to incentivise investment through the latter stages of the pandemic. For many these will be helpful, but think before you claim them, as the increase in Corporation Tax to 25% from April 2023 will have an impact.

Published in Suffolk Director Magazine, Autumn 2021
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Accountancy: Ensors Chartered Accountants

Super-deduction gives companies a Capital Allowance (CA) of 130% on their qualifying “main pool” plant and machinery expenditure.  This is much better than writing down allowances at 18%, and still an improvement even if you could claim a 100% deduction under the Annual Investment Allowance (AIA). 

There are however restrictions to think about:

  • The relief will only be available for expenditure incurred from 1 April 2021 until 31 March 2023.
  • Any expenditure under a contract entered into before 3 March 2021 will not be eligible.
  • Only new assets are eligible; second-hand purchases will not qualify.
  • The relief will not apply to cars, long-life assets, assets for leasing out, in the period of cessation, or in certain tax avoidance scenarios.

All well and good, but what’s the catch?

Ordinarily, when an asset is disposed of that has been subject to a CA claim, the disposal price is deducted from the pool; the residue of CA expenditure on which writing down allowances are claimed each year.  It is only if that pool has been exhausted, that a balancing charge will be crystallised; taxing so much of the disposal value as exceeds the pool.

With the super-deduction, the expenditure will need to be kept separately, so a balancing charge will always arise on disposal.  The chances are that disposal will take place after the rise in corporation tax, and the balancing charge will be taxable at 25%… But, if it doesn’t, then the balancing charge will be multiplied by a factor of up to 1.3 to reflect the additional tax relief claimed on acquisition.

What this tells the cynic in me, is that having decided to pre-announce the rise in Corporation Tax rates, Government realised that companies would be incentivised to delay their capital expenditure until April 2023; exactly the opposite of what they want to happen.  The super-deduction is there to eliminate most of this effect, but for many businesses it will not be a good enough reason to accelerate expenditure that they would not otherwise have made. 

Of course, what tax relief is really available after the end of the super-deduction will depend on what happens to the AIA between now and then, whether your expenditure exceeds this, and is it only eligible to writing down allowances.  Bigger businesses spending much larger amounts on plant and machinery may therefore still decide to accelerate expenditure.

So why hasn’t the super-deduction been made available to unincorporated businesses? 

Because no income tax rises have been announced, there is no reason for unincorporated businesses to defer capital expenditure.

Overall, the new relief is a welcome temporary measure to help businesses through the current economic climate. However, companies need to think carefully before making a claim or changing their investment plans. 

Malcolm McGready is a Partner at Ensors Chartered Accountants
E: malcolm.mcgready@ensors.co.uk
T: 01473 220022
or visit ensors.co.uk/corporate-finance-team

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