To help the economy recover after the pandemic, the Government has introduced a super-deduction for capital expenditure.
This initiative is to encourage companies to invest and provides enhanced capital allowances for any expenditure incurred within a limited two-year window.
Find out more by watching our video.
WHAT IS THE SUPER-DEDUCTION?
If you have expenditure that would normally qualify for the main rate capital allowance of 18%, the super-deduction will increase the allowance to 130% in Year 1.
This would be for any expenditure that falls under the plant and machinery capital allowance. The expenditure must be incurred in the period from 1 April 2021 to 31 March 2023.
If the contract for the expenditure was incurred before the Spring Budget announcement on 3 March 2021, the super-deduction does not apply.
In circumstances where plant and machinery have been purchased under Hire Purchase agreements or similar, a contract must meet additional conditions to ensure they qualify for the super-deduction.
If an accounting period crosses over beyond 1 April 2023, the rate of deduction will be based on the number of days in the accounting period that falls before 1 April 2023 and after this date.
For every £100 of expenditure on qualifying assets during the qualifying period, the company can claim capital allowances of £130 when processing taxable profits.
This means that the tax relief is £24.70, ie £130 at 19%.
WHAT HAPPENS IF A SUPER-DEDUCTED ASSET IS SOLD?
If an asset that has previously benefited from the super-deduction is sold, disposal receipts are treated as balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating the balancing charge.
WHAT CONSIDERATIONS SHOULD YOUR BUSINESS MAKE?
Careful consideration and planning should be taken into consideration by companies wishing to benefit from the super-deduction. It’s important to time the investment in qualifying assets correctly so that expenditure is incurred in the qualifying two year-period.
With the new super-deduction scheme, it’s worth considering if a planned investment after 1 April 2023 should be brought forward to qualify for the scheme.
The super-deduction is a positive move for many businesses, but that doesn’t mean a benefit for all. There is no legal requirement to state that a company must claim the super-deduction. If a company is making a loss or the profits are low, they may choose to claim Writing Down Allowances instead or tailor the claim to reduce the profit to £nil.
Similarly, if the plan is to sell the asset in a few years, it may be better to claim writing down allowances rather than feeling the impact of the balancing charges on its disposal.
As you can see, clever planning is key to ensuring you get the most out of the super-deduction.
If you’d like to know more, please get in touch with us.