At the Budget on 3 March 2021 additional capital allowances were announced by way of a new super-deduction(130%) and 50% first year allowances to encourage capital spend by companies over the next two years. These come into effect for expenditure from 1 April 2021, before 1 April 2023.

Who can claim the super-deduction and50% first year allowance (FYA)?

·        These new allowances only apply to companies who pay corporation tax

·        Individuals, partnerships and LLPs cannot benefit

What level of super-deduction allowance can be claimed?

·        Companies can claim a super-deduction by writing off 130% of qualifying expenditure on new/unused assets (second hand items do not qualify) main rate pool assets from 1 April 2021 for two years

·        For example, if a company spends £100,000 on computer equipment then the company can claim a deduction of £130,000 against taxable profits

·        With a corporation tax rate of 19%,this will lead to tax bills being reduced by nearly 25p for every £1 of qualifying spend

·        There is no expenditure limit

What type of asset will qualify for the super-deduction of 130%?

·        Capital investment in new and unused assets that qualify as main pool expenditure, subject to some specific exclusions (see below)

·        This will include expenditure such as fire alarm systems, security systems, carpets, computers equipment and servers, tractors, lorries and vans, ladders, drills and cranes, office desks and furniture, refrigeration units and electric vehicle charging points

What assets do not qualify for the super-deduction/what are the exclusions?

There are several cases where expenditure cannot benefit from these new allowances. These include:

• Expenditure is incurred in the chargeable period in which the qualifying activity is permanently discontinued
• Cars (including electric)
• Expenditure excluded from long life asset treatment by the ‘grandfathering provisions’
• Expenditure on the  provision of plant and machinery for leasing. For example, a hire/leasing     company or any vans bought, then leased to other businesses/individuals
• The company enters into a contract prior to 3 March 2021, and makes the payment after 1 April     2021
• Claiming the super-deduction is incurred in connection with a change in the nature or conduct of a trade of business carried on by a person other than the person incurring the expenditure (only if claiming the super-deduction is one of the main benefits expected to arise from the change)

Can assets on hire purchase or lease qualify for the super-deduction?

·        Assets acquired under lease (as though they are essentially rented) are not typically eligible for capital allowances and therefore neither the super deduction nor 50% FYA will not be available

·        Assets acquired under HP are treated as being owned by the company making the payments, even though title absolute may not pass until all payments have been made

·        Capital allowances can only be claimed on all payments due to be made under the HP agreement when the asset has been brought into use

·        For example, consider a company with a year end of 31 December 2021. It has paid £10,000 on deposit for an asset that is not delivered until January 2022 (i.e. post year-end). The balance of £90,000 is funded under HP and payments begin on delivery of the asset. In this case, the company would be able to claim the super-deduction on £10,000 of expenditure in the year ended 31 December 2021 and on £90,000 the following year

Can a company claim on special rate pool expenditure?

·        Companies can write off 50% of their expenditure on new/unused special rate pool assets in the first year. These would ordinarily qualify for 6% writing down allowances for expenditure in excess of the annual investment allowance (AIA)

·        This 50% first year allowance (FYA)will also apply for 2 years from 1 April 2021

·        Special rate pool expenditure includes heating and cold water systems, electrical systems, air conditioning, lifts, solar panels and thermal insulation to an existing commercial building

·        TIP: Companies with this type of expenditure (dependent on levels) may be better off claiming AIA at 100% if available instead of using this

Example of super-deduction

·        A company incurring £2m of qualifying expenditure decides to claim the super-deduction

·        As the company has spent £2m on qualifying expenditure it can deduct £2.6m (130% of the initial investment) in computing its taxable profits

·        The company will save £494,000 on its corporation tax bill (being £2.6m at 19%)

Do these new allowances replace the Annual Investment Allowance (AIA)?

·        No, the AIA continues to exist alongside the new allowances

·        The limit of qualifying expenditure for AIA remains at £1m to 31 December 2021. Thereafter the AIA is expected to fall to only £200,000

·        For expenditure over these limits writing down allowances of 18% or 6% are available

·        Expenditure on second-hand plant and machinery for instance can still benefit from AIA

·        Care will need to be taken to consider the optimum capital allowances claim and impact of any potential clawback on sale

·        Individuals and partnerships are entitled to 100% annual investment allowance (AIA) on qualifying expenditure

What happens when a company sells an asset?

·        When an asset has been sold on which the new allowances have been claimed the disposal receipts will be treated as balancing charges (taxable profits) instead of being taken to the pools. The treatment differs slightly depending on whether the super-deduction of 130% or the 50% FYA in respect of special rate pool expenditure was claimed

·        In respect of the super-deduction of130%, for example, if the company disposes of part of its fleet of lorries for£100,000 after 31 March 2023 the company will be subject to corporation tax on the full sales value in the year of disposal.

·        It is worth noting that the 130%super-deduction on qualifying expenditure provides an effective tax saving of24.7% on initial spend. The balancing charge after 31 March 2023 is due to be taxed at 25% so the company will effectively be saving tax at 25% on the net qualifying cost (original cost less disposal value) of main pool expenditure

·        Special rules exist if the super-deduction asset is disposed of prior to 31 March 2023. The disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3. Where the disposal occurs in a period straddling 1 April 2023 a lower factor than 1.3 will be used. This rule does not apply to the 50%first-year allowances for special rate expenditure

·        Where the enhanced deduction of 50%was claimed, then a balancing charge taken straight to taxable profits will be calculated in most cases on half of the disposal value. For instance, if the50% FYA was claimed in respect of solar panels and they are sold for £100,000,the balancing charge would be £50,000 in the year of disposal. The remaining £50,000 would be deducted from the special rate pool

What special rules apply in 2023?

·        The corporation tax rate will increase to 25% from 1 April 2023 for companies with profits over £250,000.Companies with profits up to £50,000 will pay corporation tax at 19% (provided they are not close investment holding companies), with marginal tax rates applying between £50,000 and £250,000.

·        The rate of super-deduction will require apportioning if an accounting period straddles 1 April 2023. This is done on a time-apportioned basis.

·        For example, if a company has a 12-monthaccounting period to 31 December 2023 the rate of relief would be:

90/365 x 30% = 7.4% + 100% = 107.4%for expenditure incurred in the period to 31 March 2023.

·        Where a company incurs an additional VAT liability in a period that ends on or after 31 March 2023 there are special rules that allow the additional liability to qualify for the 130% super-deduction.

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