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One of the major headlines of Budget 2021 was the introduction of a new two-year capital allowances 130% ‘super-deduction’ and 50% first-year allowance for special rate pool assets, which the Chancellor referred to as “the biggest business tax cut in modern British History”.
The Chancellor’s speech incorrectly described the super-deduction as reducing the company’s ‘tax bill’ by 130% of the cost. This has since been corrected and now correctly reads ‘taxable profits’ on the government’s website.
As only companies will suffer the corporation tax rate hike to 25% from 1 April 2023, it would be reasonable to presume that the Chancellor’s thinking here was to soften the blow of a future 25% rise in corporation tax rate by introducing a temporary incentive for capital investment now.
What do the rules say?
It is important to note firstly that the changes are only available to companies subject to corporation tax. This would seem harsh for unincorporated businesses, however it is worth noting that unincorporated businesses will still benefit from the £1m 100% annual investment allowance which will remain in force until at least 31 December 2021.
Expenditure incurred by companies on assets qualifying for main pool capital allowances will receive a 130 percent first-year allowance (FYA). In addition, certain assets qualifying for the lower ‘special’ capital allowances rate (e.g. integral features and long-life assets), will benefit from a 50 percent FYA.
For example, a company investing £10 million in qualifying ‘main pool’ machinery from 1 April 2021 onwards would equate to an immediate cash tax saving of £2.47 million.
The reliefs are only available in respect of new and unused plant and machinery. As such, they will not be available for property purchases except in scenarios where new assets are bought unused from a trading property developer. Hire purchase contracts will also be subject to restrictions.
Further, whilst the rules have a set end date for expenditure incurred up to 31 March 2023, in practice, as expenditure must be incurred after 1 April 2021 and the contract must be entered into from 3 March 2021, a significant amount of expenditure incurred after 1 April 2021 might not qualify on the basis that it was already committed to before Budget Day (3 March 2021).
Finally, the rules are subject to general exclusions of the capital allowances legislation. For example, landlords will not qualify because FYAs are not available for assets subject to leasing, which would seem harsh in these circumstances!
Long-life assets (plant and machinery with expected useful economic life of at least 25 years) and cars also do not qualify.
The ‘super deduction’ for investment in plant and machinery is a welcome measure and aims to ensure that the UK remains a competitive location for research and capital investment. Given the limited lifespan of the relief and the timings involved in decisions on expenditure on plant and machinery, companies should start planning now to ensure they maximise their cash tax savings from this relief.
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