To help boost investment rates, Rishi Sunak announced in the Budget 2021 a new “super deduction” of 130% is available to companies incurring expenditure on qualifying plant and machinery (P&M). This will cover expenditure incurred between 1 April 2021 and 31 March 2023 and is only available to incorporated businesses because it offers tax relief against corporation tax.
Unincorporated businesses such as sole traders and partnerships should utilise the AIA (Annual Investment Allowance) which is currently £1m until the end of 2021.
The purchase of all qualifying plant and machinery assets including IT and office equipment, solar panels, energy efficient lighting, new factory equipment like automation, warehouse machinery, data centres and industrial handling equipment like forklift trucks, should be covered by the super deduction.
The deduction enables companies to claim capital allowances of 130% of the cost of all qualifying expenditure, enabling them to generate a £24.70 reduction in corporation tax for every £100 invested on qualifying expenditure.
There are some exclusions to the assets eligible for the super deduction relief. Broadly this will be assets excluded from first year allowances in the past as well as used and second-hand assets and expenditure on contracts entered into prior to 3 March 2021 – even if expenditure is incurred after 1 April 2021.
Investments in new structures or buildings, or equipment that will be offered for rental, will not be covered by the main benefit. Equipment purchased by property landlords with incorporated rental properties, for example air-conditioning, are also excluded.
Expenditure on other ‘special rate assets’ (e.g. hot and cold water systems and other ‘integral assets’) will attract a lower 50% rate of tax relief.
Future tax implications of using the ‘super deduction’
Special disposal rules will be applied to assets against which this allowance has been claimed such that the disposal proceeds of these assets will be uplifted to 130%, to take account of the fact that the extra relief on the original expenditure was available. Where disposals occur in accounting periods straddling 1 April 2023, the uplift will be calculated on a pro-rata basis. Note, this rule does not apply to the 50% first-year allowance for special rate expenditures.
Implications due to corporation tax increase in 2023
The fact that the corporation tax rate is increasing to 25% means that the disposal proceeds may be taxed at a higher rate than that at which relief was originally provided on purchase of the asset. This will be of particular relevance where the disposal proceeds are expected to be significant, or the asset will be sold within a relatively short timeframe.
Therefore, if you plan to use the super deduction, it will be worth understanding the future tax implications in the event of a disposal. Note that not all companies will be impacted by the increase in corporation tax.
If you would like help understanding how the super deduction could benefit your company please contact partners@rjp.co.uk