March 2021 saw the Chancellor introduce the new super deduction capital allowance for companies within the charge to corporation tax. With potential relief being higher than the spend – can it really be that good?
The super deduction rules were introduced in 2021 for contracts entered into on or after 3 March and apply for capital expenditure on new unused plant and machinery incurred on or after 1 April 2021 (up to 31 March 2023).
Where the expenditure is on ‘main pool’ plant and machinery such as tractors, combines, farm equipment and computer equipment, the rate of allowance is 130% of the qualifying expenditure. A business spending £200,000 on a new tractor will be able to offset £260,000 against their trading profits.
Where the expenditure is on ‘special rate pool’ plant and machinery such as water and light systems and air conditioning in farm buildings, the rate of allowance is 50% of the qualifying expenditure. Without any other claims the standard rate of capital allowance on this type of expenditure would normally only be 6% per annum.
There is no upper limit on qualifying expenditure that can qualify for the super deduction or special rate allowance, compared to the £1m limit for the Annual Investment Allowance (AIA), for example.
Assets acquired under a hire purchase contract
With the considerable costs associated with farm equipment, many farming companies will look to buy plant and machinery on hire purchase contracts. Where a new hire purchase contract was entered into on or after 3 March 2021, but prior to 1 April 2021, companies must consider when the assets were brought into use.
- If the asset was first used in the trade prior to 1 April 2021, all capital payments due under the hire purchase contract will be treated as incurred prior to 1 April 2021 and so no super deduction relief can be claimed
- If the asset was first used in the trade after 1 April 2021, all capital payments due under the contract are treated as incurred on the day the asset was brought into use. This is particularly important where a new hire purchase contract is entered into just before 31 March 2023 as it is possible to claim a super deduction on the cost of the asset, despite most payments not being due until after 1 April 2023
What happens on a disposal?
The date of disposal and accounting period of the company are important in determining the tax position.
1) Disposal in accounting period ending before 1 April 2023
The proceeds received are multiplied by 130% (main pool assets) or 50% (special rate pool assets) and included as a ‘balancing charge’ and added directly to the company’s profits, taxable at 19%. This effectively means relief is given on the net cost.
2) Disposal in accounting period straddling 1 April 2023
This is the more complex scenario as the proceeds received will be multiplied as in scenario 1, however the multiplication factor will be less than 130%/50%. Instead a blended rate is usedbased on the number of days in the accounting period prior to 1 April 2023. The amount of the balancing charge will therefore vary depending on when the disposal takes place in the period.
3) Disposal in accounting period commencing on or after 1 April 2023
As the super deduction ends on 31 March 2023, any disposals in accounting periods commencing after this date will not have a multiplication factor to uplift any proceeds received. Instead, the proceeds received will be treated as the balancing charge, and taxed at the new rate of 25%. Unless the asset acquired retains its value (or increases in value) which is largely unlikely, the balancing charge will be less than the tax relief originally obtained.
Broadly, where a company’s profits fall between £50,000 and £250,000, from 1 April 2023 the marginal rate of tax will be 26.5% and so this may impact tax payable on disposals as well.
Interaction with the Annual Investment Allowance (AIA)
The AIA was due to reduce from £1m to £200,000 at the beginning of 2022, however the Chancellor announced an extension to the limit of £1m until 31 March 2023.
As the special rate allowance is only 50%, and the super deduction pro-rated for expenditure incurred in a period straddling 1 April 2023, farming companies should consider whether claiming AIA is more beneficial than the super deduction/special rate allowance.
A company cannot claim both AIA and the super deduction/special rate allowance on the same item of expenditure.
So is it really super?
Overall it appears that most companies, particularly those in sectors with high capital investment such as farming, will benefit from claiming the super deduction over the next year or so. It is unlikely plant and machinery will appreciate in value and so most companies will be in a better tax position than they would have been by just claiming AIA or standard writing down allowances.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.