Capital Expenditure Super Deduction

In his 2021 Budget, the Chancellor hailed the introduction of a new ‘Super Deduction’ for qualifying capital expenditure as “the biggest business tax cut in modern British history”, its aim to encourage new business investment and kick-start the economy following the recessive impact of the COVID-19 pandemic. This Briefing Note sets out how the new scheme will work and how it may affect your business.

What is the Super Deduction?

Where a business incurs expenditure on certain qualifying plant and machinery it has, until now, been able to claim tax relief for that expenditure via a system of capital allowances. These allowances range from 6% up to 100% of the expenditure, depending on the circumstances.

The Budget introduced two new ‘enhanced allowances’. Firstly, for most expenditure on plant and machinery, an allowance of 130% will be available. Secondly, for certain categories of plant and machinery (the main ones being electrical systems, heating and cold water systems and air conditioning fitted in a commercial property) the enhanced allowance will take the form of a 50% first year allowance. This briefing concentrates only on the first of these two allowances.

Who is eligible for the Super Deduction?

The Super Deduction is only available to companies subject to corporation tax. Unfortunately this means that it cannot be used by sole traders or partnerships who will continue to use the existing capital allowances rules in respect of their qualifying capital expenditure.

Furthermore, it is only available for qualifying expenditure incurred between 1st April 2021 and 31st March 2023.

How does the Super Deduction work?

In simple terms, when a company calculates its profits subject to corporation tax, any qualifying expenditure undertaken will be eligible for a deduction equal to 1.3 times the amount of that expenditure.

As an example, expenditure of £50,000 by a company on new computer equipment will allow its taxable profits to be reduced by £65,000. At current corporation tax rates this means an additional reduction in the tax charge, over and above what would otherwise be available, of £2,850. The immediate post-tax cost of the equipment is therefore £37,650.

How will my business be affected?

On the face of it the Super Deduction looks as though it can only be a good thing for businesses. The Government’s publicity makes great efforts to extol its virtues and, after a difficult time for many companies, it will provide a much needed cash flow boost to assist them in investing for the future.

However, as is often the case with tax changes, the overall position is not so clear cut when examined a little closer. At the same Budget, the Chancellor also announced an increase in corporation tax rates to take effect from 1st April 2023. The combination of these two changes means that in many instances it may in fact be more costly over the longer-term to make use of the Super Deduction. In such cases, there will be a short-term cash flow benefit which needs to be assessed in the light of potentially higher overall tax costs arising across the life of the assets.

The alternative to the Super Deduction is to continue with the existing capital allowance system, but to consider more active use of some of its provisions which have, in recent years, been of less relevance for most companies but which may now prove to be more beneficial.

How we can help you

As part of your annual accounting and tax compliance processes we can assist in analysing your expenditure to identify any which may qualify for the Super Deduction, and advise you on the appropriate record-keeping requirements. Moreover, we can advise on the options available to you for claiming relief for your capital expenditure with a view to identifying the most appropriate course of action for your company’s circumstances and requirements.

Please speak to Lee Palmer, or your usual Wenn Townsend contact, if you have any questions regarding this new tax incentive.

Source: Fri, 09 Apr 2021 11:46:53 +0100