As part of the economic recovery, the Government is encouraging companies to invest in qualifying new equipment for the period from 1 April 2021 until March 2023. The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.
Many of our clients are interested in accessing the super-deduction, so I’ll outline the key points.
What is super-deduction?
The new allowances only apply to companies. Individuals, partnerships and limited liability partnerships cannot benefit.
Companies will be able to claim:
For example, if a company spends £100,000 on qualifying plant and machinery, then the company can claim a deduction of £130,000 against taxable profits.
There is no upper limit on the amount of super deduction you can claim.
What are qualifying expenditures?
Capital investment must be in new and unused assets that qualify as main pool expenditure. The assets must not be leased or rented to customers, subject to some specific exclusions. These assets could include the following:
Do assets on hire purchase or finance lease qualify for the super-deduction?
Companies can claim super-deduction on assets on hire purchase (HP) and similar contracts, where possession of plant and machinery transfers to the acquirer but not the ownership. This is 130% for main rate plant and machinery and 50% for special rate expenditure. They can only claim capital allowances on all payments due to be made under the HP agreement when the asset has been brought into use.
There are two types of leases that are recognised for accounting purposes: finance leases and operating leases. Finance leases are typically leases for most or all of an asset’s useful life and in commercial terms are equivalent to a loan. Operating leases are usually the simple hire of an asset for a short part of its useful life.
Special rules apply to assets acquired for leasing out under a finance lease. Assets acquired under a finance lease are not eligible for capital allowances and therefore neither the super deduction or 50% special rate allowance will be available.
What happens if the asset is sold?
Disposal receipts should be treated as balancing charges (taxable profits). If an asset is sold prior to 31 March 2023, where super-deduction has been claimed, then a factor of 1.3 should be applied to the disposal value for capital allowance purposes.
This rule does not apply to the 50% first-year allowance for special rate expenditures. Where the enhanced deduction of 50% was claimed, then a balancing charge taken straight to taxable profits will be calculated on half of the disposal value. The remaining half would be deducted from the special rate pool.
Do these allowances replace the annual investment allowance?
The annual investment allowance (AIA) continues to exist alongside the new allowances and provides 100% relief for costs of qualifying plant and machinery in the year of purchase.
The limit of qualifying expenditure for AIA remains at £1m to 31 March 2023. For expenditure over these limits writing down allowances of 18% or 6% are available.
Expenditure on second-hand plant and machinery can still benefit from AIA.
Individuals, partnerships and limited liability partnerships are still entitled to 100% AIA on qualifying expenditure.
By Mandy French, Director
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