The Spring Budget of 2021 announced that there would be a temporary introduction of enhanced tax relief for expenditure on qualifying capital assets up to 31 March 2023, when the rate of corporation tax for large businesses is due to increase from 19% to 25%. A “large” business for these purposes are those with profits of over £250,000 (or lower if you have more than one company under common control). To retain the current rate of 19%, profits need to stay below £50,000 for a standalone company. Those with profits between £50,000 and £250,000 face the return to the complexity of marginal relief between the two rates.
The Super-Deduction provides tax relief on 130% of the “qualifying expenditure” and is given immediately with no limit on the total expenditure (unlike with the Annual Investment Allowance).
“Qualifying expenditure” has the same definition as assets qualifying for the main rate of capital allowances (fixtures and fittings such as office furniture, IT equipment and computers etc). There is a reduced enhancement of 50% for special rate or long life assets (integral parts of a building such as electrical systems, air conditioning etc.).
One question a number of firms may be asking themselves is whether capital expenditure should be accelerated in order to obtain the super deduction. The answer to this will depend on the following:
the rate at which the company will pay corporation tax following 31 March 2023 (which is dependent on the profits generated);
whether the company has any Annual Investment Allowance (‘AIA’) remaining. It should be noted that the AIA is currently £1million but is due to fall to £200,000 from 1 January 2022; and,
the level of qualifying expenditure.
A number of scenarios are considered below.
XYZ Limited (which is a large business and therefore pays corporation tax at 25% from 31 March 2023) incurs £150,000 of qualifying expenditure.
With super deduction (prior to 31 March 2023)
Following 31 March 2023
Tax relief is available at 19% on 130% of the expenditure i.e. £195,000.
Total tax relief = £37,050
AIA available on first £200,000 and tax relief is available at 25%.
Total tax relief = £37,500
The super deduction provides £450 less tax relief now compared with the relief that would have been obtained in delaying the expenditure to after 31 March 2023.
ABC Limited (which is a small business and therefore pays corporation tax at 19%) incurs £150,000 of qualifying expenditure.
With super deduction (prior to 31 March 2023)
Following 31 March 2023
Tax relief is available at 19% on 130% of the expenditure i.e. £195,000.
Total tax relief = £37,050
AIA available on first £200,000 and tax relief is available at 19%.
Total tax relief = £28,500
The super deduction provides £8,550 of additional tax relief now compared with the relief that would have been obtained in delaying the expenditure, and therefore cashflow allowing it appears to be worthwhile accelerating the expenditure to before 31 March 2023.
XYZ Limited (the same large business) incurs £500,000 of qualifying expenditure and therefore has exceeded the AIA of £200,000.
With super deduction (prior to 31 March 2023)
Following 31 March 2023
Tax relief is available at 19% on 130% of the expenditure i.e. £650,000.
Total tax relief = £123,500
AIA available on first £200,000 and tax relief is available at 25% resulting in tax relief of £50,000
WDA at 18% available on the balancing £300,000 i.e. a deduction of £54,000 . The resulting in tax relief is £13,500 (in the current year)
Total tax relief = £63,500
As can be seen from the above, if the capital expenditure is likely to exceed the AIA then, cashflow permitting, expenditure ought to be accelerated.
The super deduction is subject to other considerations which include the following:
It is only available to trading limited companies i.e. not available for partnerships or investment companies.
The assets must be new and unused.
Cars (even electric) do not qualify. However, vans and trucks can qualify.
The enhanced deduction is not available for intangible assets such as goodwill or patents which may be acquired on M&A transactions.
There can be a clawback of the expenditure when the asset is disposed of depending on when it is disposed of.
If you are considering investing in fixed assets in the near future, potentially linked with IT investment or office refurbishments, it would pay to consider what to acquire and when to acquire it. We’re here to help.
