18th May 2021
A super explanation of the Super Deduction Tax Relief from Davenham Asset Finance
A major talking point coming from the Chancellor’s Spring Budget was the announcement of the Super Deduction (SD) tax relief available to companies for investment in assets from 1st April 2021 to 31st March 2023. Now the dust has settled, and commentators have given their opinions, is the relief as good as it seems and deserve the headlines it originally generated? Should businesses be rushing to take advantage of the SD - should tax drive a business decision?
The following blog looks to answer these questions and examines how the SD works.
Background
Businesses obtain tax relief on capital expenditure by claiming Capital Allowances (CA’s). Currently, qualifying expenditure on assets (new and used) of up to £1m attracts 100% relief by claiming the Annual Investment Allowance (AIA). The level of the allowance changes from year to year and has recently been extended to Jan 2022. So the current £1m limit could change!
Qualifying expenditure over £1m would attract CA’s at the rate of 18% (a writing down allowance WDA).
What is the Super Deduction Tax Relief?
In order to kick start the economy following the massive Covid-19 impact, which saw levels of business investment materially fall (a reduction of 11.6% between Q3 2019 and Q3 2020), Rishi Sunak stated on 3rd March 2021 that expenditure incurred by companies on new, unused and qualifying plant and machinery assets between 1st April 2021 and 31st March 2023 would benefit from a generous first-year capital allowance (FYAs).
It is important to note that these reliefs are only available for contracts entered into after 3rd March 2021 and relate to new, unused and qualifying plant and machinery.
What assets qualify for the super deduction?
The UK Government has described the types of assets that may qualify as part of the super deduction tax relief FYA as including but not limited to the following:
The following table compares the previous system with the use of the new SD and how it would work:
Previous System
With the Super Deduction
Are there any conditions?
Yes - In order to benefit from the super deduction, the investment must meet the following key criteria:
Furthermore, the expenditure will not be eligible if any of the following general exclusions apply, such as:
So, should we be advising all our clients to go and buy as much new equipment as they can before 31st March 2023? Well, no, as things aren’t quite that simple because (uncoincidentally) as from 1st April 2023, a company which makes profits of £250,000 or more will be taxed at 25%.
It looks as if the “brains” at the Treasury have put some thought into how things change / develop over time.
Example
A company has the option to buy a crane for £200,000 either in the year ended 31 March 2023 or in the following year. Thrilled by the prospect of the SD and without taking advice, they opt to buy the crane before 31 March 2023. This will give rise to a £260,000 tax deduction (£200,000 @ 130%), at 19% this has a tax benefit of £49,400.
However, a 25% (tax rate as from 1 April 2023) deduction of 100% (claimed under AIA) of the cost expended in the following year would be worth £50,000. You may say “how can we be so sure of the 100% deduction when as mentioned above we only have certainty on the AIA cap until Jan 2020?” and yes, it’s not guaranteed - the £1m cap on the annual investment allowance was extended for another year in the recent budget, although it had been set to be limited to £200,000. We will learn more as time goes on. The point is, it’s not clear cut.
Commentator Observations
The above example shows that it will not always make sense for a company to accelerate its investment in pursuit of the SD. However, this does depend on a certain amount of conviction (or information) that the current trend of Annual Investment Allowance limits will continue. Furthermore, as the SD has no expenditure cap, the logic of the above example will not work for higher amounts of expenditure which will exceed the annual investment allowance after 31st March 2023. It is, however, surely no coincidence that 130% of 19% equates to the new corporation tax rate of 25% (it is actually 24.7%). The Government is clearly saying “Don’t wait for the increase in corporation tax to invest. We will give you a higher rate tax deduction (or thereabouts) now!”.
As ever clients should think carefully before embarking any form of capital investment plan and take qualified advice when the investment sums are material.
Remember what happens when you dispose of assets
If an asset in which you have invested under the criteria and therefore subject to the SD is sold or disposed of, a balancing charge will arise and therefore the following will apply:
An interesting point to consider is when the item is sold, if SD applies, 130% of the proceeds are charged to tax, but after March 2023 this may attract a charge at a higher CT rate to that applied at the time of the purchase.
What about investment using finance?
Given the global economic impact of coronavirus, it is likely that companies will not have cash readily available to make the investments into plant and machinery, however, expenditure that arises using funding under a hire purchase or similar contract must meet additional conditions to qualify for the super deduction or SR allowance:
And this is where Davenham Asset Finance can help!
At Davenham, we are best-placed to support you in obtaining the funding you need for your new asset investments. We have an experienced in-house team that are able to work alongside all parties involved including suppliers and accountants, ensuring the client receives the funding, as well as support in meeting the conditions for eligible expenditure under the Super deduction tax relief programme.
If you have any questions on the Super Deduction tax relief or would like to know more about asset finance and how we can help fund your purchase, please call a member of the helpful Davenham Asset Finance team on 0161 832 8484 or email enquiries@davenham.co.uk. If your question is of a technical nature, please ask and we will ask “a man who can” answer the question.
The following blog looks to answer these questions and examines how the SD works.
Background
Businesses obtain tax relief on capital expenditure by claiming Capital Allowances (CA’s). Currently, qualifying expenditure on assets (new and used) of up to £1m attracts 100% relief by claiming the Annual Investment Allowance (AIA). The level of the allowance changes from year to year and has recently been extended to Jan 2022. So the current £1m limit could change!
Qualifying expenditure over £1m would attract CA’s at the rate of 18% (a writing down allowance WDA).
What is the Super Deduction Tax Relief?
In order to kick start the economy following the massive Covid-19 impact, which saw levels of business investment materially fall (a reduction of 11.6% between Q3 2019 and Q3 2020), Rishi Sunak stated on 3rd March 2021 that expenditure incurred by companies on new, unused and qualifying plant and machinery assets between 1st April 2021 and 31st March 2023 would benefit from a generous first-year capital allowance (FYAs).
- Qualifying assets - new plant and machinery assets will benefit from a 130% FYA - known as the ‘Super Deduction’(SD).
- Qualifying assets incurred on ‘special rate’ (6% writing down allowance) assets will receive a 50% FYA – ‘known as SR allowance’.
It is important to note that these reliefs are only available for contracts entered into after 3rd March 2021 and relate to new, unused and qualifying plant and machinery.
What assets qualify for the super deduction?
The UK Government has described the types of assets that may qualify as part of the super deduction tax relief FYA as including but not limited to the following:
- Tractors, lorries, vans
- Yellow plant
- Machine tools
- Refrigeration units
- Foundry equipment
- Compressors
- Ladders, drills, cranes
- Solar panels
- Computer equipment and servers
The following table compares the previous system with the use of the new SD and how it would work:
Previous System
- A company spends £10m on qualifying assets
- Deducts £1m using the AIA in year 1, leaving £9m
- Deducts £1.62m using WDAs at 18%
With the Super Deduction
- The same company spends £10m on qualifying assets
- Deducts £13m using the super deduction in year 1
Are there any conditions?
Yes - In order to benefit from the super deduction, the investment must meet the following key criteria:
- The expenditure must be incurred between 1st April 2021 and 31st March 2023 on new, unused plant or machinery qualifying assets not second-hand used for trading purposes.
- The SD only applies to assets that otherwise qualify for the 18% main rate writing down allowance.
- By a company within the charge to Corporation Tax – note unincorporated businesses (Sole Traders Partnerships LLP’s etc) are excluded.
- For use other than in a ring fence trade.
Furthermore, the expenditure will not be eligible if any of the following general exclusions apply, such as:
- Expenditure in a chargeable period where the qualifying activity is permanently discontinued.
- Expenditure on cars and certain long-life assets.
- Expenditure on the provision of plant or machinery for leasing.
- Expenditure on an asset which was initially acquired for purposes other than those of the qualifying activity.
- Assets acquired by way of a gift.
So, should we be advising all our clients to go and buy as much new equipment as they can before 31st March 2023? Well, no, as things aren’t quite that simple because (uncoincidentally) as from 1st April 2023, a company which makes profits of £250,000 or more will be taxed at 25%.
It looks as if the “brains” at the Treasury have put some thought into how things change / develop over time.
Example
A company has the option to buy a crane for £200,000 either in the year ended 31 March 2023 or in the following year. Thrilled by the prospect of the SD and without taking advice, they opt to buy the crane before 31 March 2023. This will give rise to a £260,000 tax deduction (£200,000 @ 130%), at 19% this has a tax benefit of £49,400.
However, a 25% (tax rate as from 1 April 2023) deduction of 100% (claimed under AIA) of the cost expended in the following year would be worth £50,000. You may say “how can we be so sure of the 100% deduction when as mentioned above we only have certainty on the AIA cap until Jan 2020?” and yes, it’s not guaranteed - the £1m cap on the annual investment allowance was extended for another year in the recent budget, although it had been set to be limited to £200,000. We will learn more as time goes on. The point is, it’s not clear cut.
Commentator Observations
The above example shows that it will not always make sense for a company to accelerate its investment in pursuit of the SD. However, this does depend on a certain amount of conviction (or information) that the current trend of Annual Investment Allowance limits will continue. Furthermore, as the SD has no expenditure cap, the logic of the above example will not work for higher amounts of expenditure which will exceed the annual investment allowance after 31st March 2023. It is, however, surely no coincidence that 130% of 19% equates to the new corporation tax rate of 25% (it is actually 24.7%). The Government is clearly saying “Don’t wait for the increase in corporation tax to invest. We will give you a higher rate tax deduction (or thereabouts) now!”.
As ever clients should think carefully before embarking any form of capital investment plan and take qualified advice when the investment sums are material.
Remember what happens when you dispose of assets
If an asset in which you have invested under the criteria and therefore subject to the SD is sold or disposed of, a balancing charge will arise and therefore the following will apply:
- If only part of the original expenditure qualified for either allowance, or a different allowance was claimed on part of the expenditure, only part of the disposal receipt will be treated as a balancing charge.
- For SD assets, the balancing charge will be based on a proportion of the Disposal value.
- Where the SD has been claimed, the disposal value for the asset will have a factor of 1.3 applied to it (so the 130% in reverse), except where the disposal is in an accounting period straddling 1st April 2023, where a lower factor is applied.
An interesting point to consider is when the item is sold, if SD applies, 130% of the proceeds are charged to tax, but after March 2023 this may attract a charge at a higher CT rate to that applied at the time of the purchase.
What about investment using finance?
Given the global economic impact of coronavirus, it is likely that companies will not have cash readily available to make the investments into plant and machinery, however, expenditure that arises using funding under a hire purchase or similar contract must meet additional conditions to qualify for the super deduction or SR allowance:
- Condition A: under the agreement, plant or machinery is bailed (or in Scotland hired) in return for periodical payments by the business to whom it is bailed (or hired).
- Condition B: under the agreement, the property in the plant or machinery will pass to the business to whom they are bailed (or hired) if the terms of the agreement are complied with and one or more of the following events occurs:
- The exercise of an option to purchase by that person.
- The doing of another specified act by any party to the agreement.
- The happening of another specified event.
- The company to whom plant or machinery is bailed or hired is the person who incurs the expenditure.
And this is where Davenham Asset Finance can help!
At Davenham, we are best-placed to support you in obtaining the funding you need for your new asset investments. We have an experienced in-house team that are able to work alongside all parties involved including suppliers and accountants, ensuring the client receives the funding, as well as support in meeting the conditions for eligible expenditure under the Super deduction tax relief programme.
If you have any questions on the Super Deduction tax relief or would like to know more about asset finance and how we can help fund your purchase, please call a member of the helpful Davenham Asset Finance team on 0161 832 8484 or email enquiries@davenham.co.uk. If your question is of a technical nature, please ask and we will ask “a man who can” answer the question.