In the 2021 Spring Budget, the UK Chancellor of the Exchequer announced the new ‘super-deduction’ presenting companies with a never-before-seen opportunity to benefit from significant tax relief on their capital investment in plant and machinery.
The aim of the relief was to encourage investment in improving productivity (a long-term ambition for the UK); however, it was also set up with the increase in the UK’s corporation tax rate (from 19% to 25%) in mind. Ultimately, such a sharp rise in rate may lead to companies delaying investment to ensure capital tax reliefs were obtained when the tax shield is of greater value.
The super-deduction, which is only for companies within the charge to corporation tax, provides 130% relief for (most) plant and machinery (with certain exclusions) as opposed to the existing 18% writing down allowance each year.
Put another way, at the current 19% tax rate, a 130% deduction results in a 24.7% immediate cash tax saving (assuming companies have tax to pay).
Additionally, most other plant and machinery expenditure that doesn’t qualify for the super-deduction will qualify for the Special Rate (“SR”) first year allowance providing a 50% first year deduction rather than the current 6% deduction relief such items receive.
Of course there are some notable exclusions - cars, second hand items and assets that are leased out are the most common.
How does it work?
- Companies, who enter into a contract to acquire plant and machinery for the purpose of their business on or after 3 March 2021 can potentially benefit from the reliefs.
- To qualify the expenditure must be incurred (note that these rules aren’t always straightforward) between 1 April 2021 and 31 March 2023.
- The claim must be made in the tax return of the company for the year in which the expenditure is incurred and, importantly, the asset must be owned by the company in that period as well.
- The asset acquired must not be second-hand and it cannot have been acquired from a connected party.
What sort of assets will qualify for the super-deduction?
Most items of plant or machinery will qualify if:
- it’s not a car;
- it’s not second hand;
- it’s not in the list below (see SR allowance);
- it doesn’t have an expected life of more than 25 years; and,
- it’s not used for leasing
then there’s a good chance that it will be eligible for the super-deduction if it meets the timing criteria above.
What sort of assets will qualify for the SR allowance?
These are items of plant as well but typically tend to be those with longer lives for example this will include:
- assets with an expected life of more than 25 years;
- certain assets that are integral to a building - electrical systems, lighting systems, hot and cold water systems, heating, cooling and ventilation systems, lifts, elevators and moving walkways and external solar shading systems; and
- solar panels.
Does software qualify?
Capital expenditure on software (which meets the relevant requirements) can qualify for the super-deduction where treated as a tangible fixed asset or, if it has been treated as an intangible fixed asset, where elected into the regime.
What are the pitfalls?
Timing is everything -
- A claim can only be made in the year of expenditure so it is important to understand in which period the expenditure was actually incurred for capital allowances purposes (which is not always the same as “paid for”).
- Ownership of the assets is key and (with the exception of hire-purchase agreements) the super-deduction/SR allowances are generally not presently available unless the asset on which the claim is made is actually owned in the period in which the expenditure is incurred.
- Assets on which the super-deduction/ SR allowances have been claimed must be tracked separately and if they are disposed of for consideration (real or deemed) then there will be a clawback of allowances (which could be as much as 130% where the super-deduction has been claimed).
What should companies wanting to claim the super-deduction/SR allowance do now?
The super-deduction and SR allowance are both generous tax reliefs; however, there are a number of complex rules that may need to be navigated in order to benefit from them.
Companies should ensure, where they hope to benefit from the relief - either on their normal capital expenditure or because of additional investment as they hope to optimise their use of the relief - that they meet the criteria and will actually benefit from the relief on their expenditure between now and March 2023.
How can PwC help?
We have a team of dedicated capital allowances specialists made up of tax and surveying professionals who advise businesses on a daily basis, helping them to ensure they can comply with and benefit from the current capital allowances regime.
We love to talk to companies who are thinking about how these rules impact them, please contact Matthew Greene or you usual PwC Capital Allowances specialist if you would like to discuss any aspect of this article further.