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Kirk Rice Blog

Capital Allowances Super DeductionWritten on May 10, 2021 by Kirk Rice LLP

In light of COVID-19 and the effect on the UK Economy, the government has introduced a new and very generous temporary capital allowance to encourage investment by businesses to support economic recovery.

This temporary capital allowance relief only applies to expenditure incurred on plant and machinery from 1 April 2021 to 31 March 2023. The allowances only apply to companies and, therefore, not for self-employed businesses and partnerships. There is no limit to the amount of expenditure that can qualify for these reliefs.

The additional relief is split as follows:

  • A super deduction of 130% on new general pool plant and machinery. These would ordinarily only qualify for a writing down allowance of 18%; and
  • A first year allowance of 50% on new plant and machinery that qualifies as special rate expenditure. These would ordinarily only qualify for a writing down allowance of 6%.

The allowances are available in addition to the ongoing Annual Investment Allowance (AIA) which gives 100% relief on the cost of qualifying plant and machinery. This is currently capped at £1m per annum before reducing to £200,000 per annum on 1 January 2022.

There are a number of restrictions that apply. In particular, cars and assets used for the purpose of leasing do not qualify for these new reliefs. However, on 18 May, an amendment was made to the Finance Bill meaning that the allowances will be available to property lessors for qualifying spend on background plant and machinery including fixtures despite the fact that the assets are being leased.

There is a difference in tax treatment for assets disposed of on which the super deduction was previously claimed. Normally, where an asset qualifying for capital allowances is disposed of, the proceeds received are deducted against the appropriate capital allowances pool. The effect of this is that the proceeds are not immediately subject to corporation tax, but instead, the credit is spread over a longer period through future capital allowance claims.

However, in the case of assets on which a claim for super deduction was made, the proceeds are recognised for tax purposes as a balancing charge in the period. The result of this is that the whole proceeds are taxed in the year of receipt. In addition, the balancing charge will be multiplied depending on the date of disposal as follows;

  • In an accounting period ending before 1 April 2023 – the balancing charge is multiplied by 1.3
  • In an accounting period that straddles 1 April 2023 – the balancing charge is multiplied by 1.3, but this reduced proportionately by the number of days in the period which fall after 1 April 2023
  • In an accounting period that starts after 1 April 2023 – the balancing charge is not subject to a multiplier. However, it should be noted that the main rate of corporation tax increases from 19% to 25% from this date.

Businesses that are contemplating significant capital expenditure over the next two years should consider the above temporary relief as a means to reduce their corporation tax liabilities. The business is loss-making, and advice should be sought regarding the most efficient use of the additional losses that these additional capital allowances will create.

For further information on super deduction click here to download the Government factsheet.

If you would like to discuss whether your business qualifies for capital allowance super deduction please email info@kirkrice.co.uk