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News – 10.04.24
Form PF: Are you up to speed with the latest developments?
Through this insight we will bring to your attention the main changes in a bitesize manner so that you can stay abreast of the requirements as they may apply to your firm. … Read more
Insight – 16.04.24
US and UK tax on carried interest
US and UK tax on carried interest … Read more
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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%
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:
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.
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.
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.
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.
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.
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:
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
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:
Get in touch to discuss whether these changes may affect you, and how to optimise from the tax relief available.
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