Final Call to Qualify for Super Deduction First Year Allowance by 31 March 2023

The 130% super deduction first year allowance comes to an end on 31 March 2023. Therefore, time is running out for companies to take advantage of this generous relief.

A recap of the super deduction

Since 1 April 2021, companies have been able to claim a generous first-year enhanced capital allowance of 130% on expenditure incurred on qualifying plant and machinery that would ordinarily qualify for main rate writing down allowances at 18%.

The enhanced capital allowances measure allows companies to reduce their corporate tax liability by up to 25p for every £1 invested in qualifying expenditure.

In practice, this means that where a company invests £100,000 in new and unused qualifying plant and machinery, the company can deduct £130,000 (130% of the initial expenditure) in calculating its taxable trading profits. A super deduction of £130,000 will result in a direct corporate tax saving of £24,700 based on the current corporation tax flat rate of 19%.

Planning capital expenditure before 31 March 2023?

With the super deduction qualifying period coming to an end, it is important that companies give thought to the level of 2023 expenditure that will qualify for the super deduction and, importantly, the rate of corporate tax relief that will apply. The main rate of corporation tax will increase from 19% to 25% from 1 April 2023 for companies with taxable profits of more than £250,000, or lower for certain companies in corporate groups or under common ownership.

For year ends that straddle 31 March 2023, the super deduction percentage proportionately reduces to ensure that the effective rate of tax relief remains at circa 25%. For example, companies with a September 2023 year end may choose to accelerate capital expenditure before 31 March 2023 which would result in a 115% super deduction.

When is expenditure ‘incurred’?

For companies to qualify for the super deduction, expenditure must be ‘incurred’ on or before 31 March 2023. For capital allowances purposes, expenditure is generally treated as ‘incurred’ where there is an unconditional obligation to make payment (and when such payment is due within 4 months of the unconditional obligation to pay coming into effect), which is not necessary when the payment is made to a supplier.

How Meston Reid & Co can help

In summary, companies should review their capital expenditure plans to consider whether accelerating capital expenditure would be beneficial before the super deduction ends on 31 March 2023.

There are occasions where accelerating expenditure and claiming super deduction will not give rise to material tax benefits in comparison to claiming the annual investment allowance (AIA) post 1 April 2023. Therefore, companies should seek professional advice prior to incurring significant capital expenditure to optimise their capital allowances claims and minimise future costs.

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.