Capital Allowance Super-Deduction explained
The Treasury announced on 3 March 2021 the introduction of a 130% Capital Allowance super-deduction as well as 50% first-year allowance (FYA) on special rate (SR) assets. These are just one of many incentives the UK government has used to improve business investment, so let’s take a comprehensive look at how businesses can take advantage of this.
What’s the rundown?
The new allowances, active from 1 April 2021 to 31 March 2023, are of immense benefit to businesses investing in qualifying equipment by giving them a high tax deduction in the tax year of purchase. They can also be used alongside the Annual Investment Allowance (AIA), which provides 100% relief on qualifying plant and machinery costs – which can go as high as £1m per business for the 2021 calendar year.
As this is an incentive to help companies reduce corporation tax bills, the super-deduction and SR are only available to companies paying corporation tax, so individuals, LLPs and partnerships cannot expect to benefit. It is also important to note that the contract for qualifying capital assets was entered after 3 March 2021, and the expenditure was made after 1 April 2021.
What are the qualifying investments?
- Super-deduction includes all new plant and machinery that would otherwise qualify for the 18% main pool WDAs
- SR allowances cover new plant and machinery that qualify for the 6% special rate pool (inc. long-life assets and integral building features)
Assets that have their own capital allowance rates (such as cars) or second-hand assets will not qualify for inclusion in the main or special rate pool. Leased plant and machinery are excluded from the capital allowance, as well as services that arise from the provision of the leased plant and machinery, such as operators.
It could be expected then that property groups or landlords who lease plant and machinery as part of property lease would be excluded from the capital allowance relief. The installation of integral features in a let building was of a particular point of interest. The May 2021 Finance Bill rectified these concerns by ensuring that property lessors were eligible to claim the super-deduction or SR on leased plant and machinery for a building. Allowances can be claimed if property lessors lease background plant and machinery which is essential to the function of a building (e.g. heating, ventilation, electrical systems).
How much relief can I claim?
There is no cap on the amount of capital investment that qualifies for both new allowances. In most cases, the super-deduction will be more beneficial for companies instead of claiming AIA for main pool assets. However, there may be an exception for small companies who may find that AIA is preferable over SR, but only if the total expenditure on special rate pool assets does not exceed £1m.
The table below details the effective relief rates for the capital allowance claims:
|Class||Capital Allowance claim||Capital Allowance rate||Asset type||Effective relief cost (Y1)|
|Main plant and machinery||Super-deduction||130%||New||24.7%|
|Special Rate Pool||6%||Second-hand||1.1%|
What impact is there on disposals?
Expenditure and disposal valuation on plant and machinery is calculated in the usual manner, with the main difference being that the amount incurred on assets claimed as super-deduction or SR allowances acts as a balancing charge. As the FYA disposal values do not affect the main and special rate pools, a 25% corporation tax (as opposed to the normal 19%) is imposed on the charge if the disposal was made after 1 April 2023.
If the disposal was made before 1 April 2023, a calculation must be made for assets under which the super-deduction was previously claimed for. This means that the disposal value is equal to 130% of the asset sale. The main takeaway is that assets claimed as super-deduction or SR allowance must be continuously tracked until disposal, even if they are excluded from the main or special rate pool.
Can I set deductions against my losses?
The usual capital allowance rules still apply with the super-deduction and SR, so it is still possible to carry backwards (maximum of three years) or forwards in the interests of tax efficiency.
If you’re planning to make use of the super-deduction or SR allowances, get in touch with our team for all help and advice on capital allowance claims.