The pandemic has forced businesses to adapt in ways they hadn’t even considered before. The increase in working from home left many businesses forced to purchase equipment and machinery to keep up with the demand. The Government recognises this and has introduced a super-deduction for capital expenditure.

This initiative is set to encourage companies to invest and provides enhanced capital allowances for any expenditure incurred within a limited two-year window.  An alternative to the Annual Investment Allowance (AIA), companies will have two choices. They can either take advantage of the super-deduction or make use of the new first-year allowance. This depends on whether the expenditure is on assets that would qualify for main rate capital allowance or special rate capital allowances. 

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 Day 2021 of 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 to 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 relief is £24.70 (£130 X 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 the qualifying period should be accelerated.  Do you have any investments you were planning to make?

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.

NEW FIRST-YEAR ALLOWANCE

Where expenditure on most new plant and machinery is incurred from 1 April 2021 to 21 March 23, a new first-year allowance of 50% is available for expenditure. This is for any new plant and machinery which would normally qualify for a special rate Writing Down Allowance of 6%.  The new first-year allowance, as with the super-deduction, is only available to companies.

This is a great initiative that may be beneficial where the annual investment allowance limit has been used up. This would be classed as an alternative and, although it doesn’t give 100% deduction, it’s still a saving.

As you can see, clever planning is key to ensuring you get the most out of the super-deduction.

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Any questions?

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