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Last updated: 13 Jul 2021
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What is the super-deduction capital allowance scheme?

As part of the Chancellor's 2021 budget announcement, a new "super-deduction" capital allowance scheme was announced. Here we set out what the changes involve, key dates you need to be aware of, and what this means for your company. 
What's new

What’s new?

A super-deduction of 130% will be available as a first-year relief on main pool capital allowance expenditure, compared to the previous annual 18% capital allowance deduction.

A special rate allowance of 50% will be available as a first-year allowance on special rate pool capital allowance expenditure, compared to the previous annual 6% capital allowance.

About the author

Shriya Dheir

+44 (0)20 7710 3126
DheirS@buzzacott.co.uk

What’s new?

A super-deduction of 130% will be available as a first-year relief on main pool capital allowance expenditure, compared to the previous annual 18% capital allowance deduction.

A special rate allowance of 50% will be available as a first-year allowance on special rate pool capital allowance expenditure, compared to the previous annual 6% capital allowance.

Key dates

Key dates

3 March 2021 - ONLY contracts entered into from this date, where expenditure is incurred from the 1st April 2021, will be eligible for super-deduction capital allowances

1 April 2021 – 31 March 2023 - Qualifying plant and machinery expenditure incurred within this period will be eligible for super-deduction capital allowances

1 April 2023 - Qualifying plant and machinery expenditure incurred from this date will no longer be eligible for super-deduction capital allowances, and will revert back to the prior rates of 18% and 6%

What are the conditions

What are the conditions?

In addition to the above date requirements and limitations, the following conditions MUST be met in order for the super-deduction rates/allowances to apply:

  • The super-deduction/allowances are ONLY available to Limited companies, and NOT LLPs, sole traders or partnerships who will continue to rely on AIAs and traditional capital allowances
  • The company MUST be within the charge of corporation tax
  • Plant and machinery purchased MUST be new and not second-hand
  • Normal exclusions continue to apply and special treatment applies on disposal

An amendment to the Finance Bill 2021 has meant that property lessors and landlords are no longer prohibited from claiming these tax incentives. They too are able to benefit from the more generous tax relief on investments in plant and integral features such as water, heating and air conditioning systems.

Expenditure must also be on ‘background’ assets, that is, expenditure which is expected to be installed in or on the site of a building which contribute to its functionality. While this definition covers a wide range of assets, a significant number of these items will be ‘integral features’ rather than assets on which the super deduction will be available. Therefore, for some eligible lessors the relief available will purely be a timing difference.

Special treatment of disposals

Plant and machinery that has previously benefited from the 130% super-deduction, which is disposed of in an accounting period ended in the two year period to 31 March 2023, will be subject to an increased balancing charge.

Any proceeds received will be multiplied by 130%, increasing the balancing charge, and therefore decreasing the overall taxable benefit received from the super-deduction.

For this reason, companies need to keep a detailed record of which assets have received the 130% super-deduction, so that in the event they are disposed of in the two year period to 31st March 2023, the appropriate balancing charge can be calculated.

What does this mean for your company

What does this mean for your company?

In summary, the super-deduction and special rate allowance will provide additional deductions from taxable profits compared to traditional capital allowances, and will therefore help to reduce the corporation tax liability of a company. A side-by-side comparison can be found below.

Other important information

In addition to the above super deductions, the Annual Investment Allowance (AIA) of £1,000,000 has been extended to 31 December 2021, and can be used to relieve expenditure not eligible for the super-deductions. It’s presumed that the allowance will revert back to £200,000 from 1 January 2022 and any qualifying capital expenditure incurred after this date will be offset against this specific allowance.

What are ‘capital allowances’?

Capital allowances are a deduction from taxable profits, calculated by multiplying the cost of qualifying expenditure by the rate applicable to each capital allowance pool, and help to reduce a business’s corporation tax bill.

How do I know if an asset is main pool or special rate pool?

Most plant and machinery expenditure will be for assets used in the course of business, and these assets will be allocated to the main and special rate pools. Below are some examples of expenditure that would fall within these pools and be eligible for the super-deductions:

Main pool

  • Computer equipment and servers
  • Larger machinery (e.g. CT Scanners)
  • Furniture (excluding fixtures)
  • Lorries, vans and tractors (excludes cars, including electric vehicles)

Special rate pool

  • Integral features (electrical systems, heating and ventilation systems, lifts, water systems)
  • Long-life assets (25 year+ useful life)
  • Solar panels
  • Thermal insulation
  • Provision of cushion gas
An example

Old vs new: A side by side comparison

Company A has taxable profits of £5,000,000, before capital allowances, for the 12 month period ending 31 March 2022, and incurs £1,000,000 of new qualifying plant and machinery expenditure within the same period.

The expenditure has been allocated 80/20 between the main and special rate pool.

Based on the below, capital allowances would traditionally result in a £156,000 deduction and tax saving of £29,640. However, as the company and expenditure meets the conditions for the super deduction, capital allowances are calculated at £1,140,000 and deducted from taxable profits, producing a tax saving of £216,600.

The new super-deductions therefore have a tax benefit of £186,960 in comparison with the old rates for this example, demonstrating the massive potential tax benefits of the deduction.

Taxable profits: £5,000,000.00

Estimated tax @ 19%: £950,000.00

OLD RATE

    Main pool @ 18% Special rate pool @ 6%
Plant & machinery expenditure £1,000,000.00 £800,000.00 £200,000.00
Capital allowances   £144,000.00 £12,000.00
Total capital allowances £156,000.00    
Tax saving £29,640.00    

New tax bill: £920,360.00

NEW RATE

    Main pool @ 130% Special rate pool @ 50%
Plant & machinery expenditure £1,000,000.00 £800,000.00 £200,000.00
Super-deduction allowances   £1,040,000.00 £100,000.00
Total capital allowances £1,140,000.00    
Tax saving £216,600.00    

New tax bill: £733,400.00

Additional tax saving: £186,960.00

Disposals and balancing charges: A brief example

Company B purchases a large quantity of new computers for £10,000 in May 2021, upon which the 130% super-deduction allowance is claimed, totalling £13,000.

The computers are then disposed of in the accounting period ending 31 December 2022 as part of a technology overhaul, for £8,000.

Under the rules for disposal of super-deduction assets, the position for the period ending 31 December 2022 is as follows:

  • A balancing charge of £10,400 is calculated (£8,000 proceeds * 130%)
  • The tax deduction retained on the computers is £2,600 (£13,000 - £10,400)
  • Tax deductions of £600 has been lost as a result of the disposal during the two year period to 31 March 2023, and an overall tax saving loss of £114 (£600*19%)
How can we help?

Get in touch to discuss whether these changes may affect you, and how to optimise from the tax relief available.

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