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How super is the ‘superdeduction’ for companies?

How super is the ‘superdeduction’ for companies?

Kyle Gordon - Tax Advisor

In the 2021 spring budget, the Chancellor announced a new enhanced capital allowances measure for companies to encourage capital expenditure. The ‘super deduction’ is a first year allowance (FYA) which provides a 130% first year relief on qualifying main rate plant and machinery capital expenditure that ordinarily qualifies for 18% writing down allowances.

The enhanced capital allowances measure allows companies to reduce their tax liability by up to 25p for every £1 invested into qualifying main rate plant and machinery.

What is the qualifying criteria?

The super deduction is only available to limited companies who are subject to UK corporation tax. It is not available to sole traders or partnerships.

  • The plant and machinery must be new and unused. Expenditure on second-hand or refurbished assets are specifically excluded from the enhanced allowance.
  • The plant and machinery must qualify for main pool allowances.
  • The allowance only applies to contracts placed after 3 March 2021.
  • It covers capital expenditure on plant and machinery incurred between 1 April 2021 and 31 March 2023.

What is the impact on my company’s cash flow?

  • Spending £100k on qualifying plant and machinery will mean the company can deduct £130k (130% of the initial expenditure) in calculating its taxable trading profits.
  • A superdeduction of £130k will result in a tax saving of £24,700 from its corporation tax liability based on the current corporation tax rate of 19%.

What if my company is loss making?

For loss making companies, the super deduction will enhance the current year trading loss. As well as the regular loss treatment, it is worth noting that the Government has also temporarily extended the trading loss carry back rules so that trading losses can be carried back 3 years instead of 1 year.

This gives potential to use the super deduction allowance to enhance a current year trading loss and generate repayments of corporation tax by carrying the losses back against the 3 preceding years’ chargeable profits.

Is it too good to be true?

  • Super deduction assets are not pooled, meaning that the disposal of plant and machinery which has previously been subject to a super deduction claim will always give rise to a balancing charge and this balancing charge will be subject to corporation tax (currently 19%).
  • Disposing of a super deduction asset before 31 March 2023 will give rise to an enhanced tax disposal value calculated by using a multiple of 1.3 to the sales proceeds. This is then proportionately reduced for chargeable accounting periods which straddle 31 March 2023.
  • The main rate of corporation tax is increasing to 25% from financial year 2023, therefore it is possible that the balancing charge arising on the disposal of super deduction assets will be taxed at 25%, and not at the current rate of 19%.

How Meston Reid & Co can help

Given the complications surrounding the potential disposal of super deduction assets, it is vital that companies seek professional advice to optimise their capital allowances claim and minimise future exposure to higher corporation tax rates. This may, where appropriate, require forecasting of future profits, losses and capital expenditure to make the correct decision from a tax perspective.

There are occasions where the super deduction cannot be claimed, for example where the assets acquired are not new and unused, and the Annual Investment Allowance may be instead be available.

If you would like to discuss the super deduction relief in more detail, please contact Kyle Gordon (gordonk@mestonreid.com) who will be happy to help.