Now that the 2020/21 tax year has come to an end, there are a variety of tax filing obligations on employers. One of these obligations is…
At the Budget on 3 March 2021 additional capital allowances were announced by way of a new super-deduction (130%) and 50% first year allowances to encourage capital spend by companies over the next two years.
Who can claim the super-deduction and 50% first year allowance (FYA)?
- These new allowances only apply to companies who pay corporation tax
- Individuals, partnerships and LLPs cannot benefit
What level of super-deduction allowance can be claimed?
- Companies can claim a super-deduction by writing off 130% of qualifying expenditure on new/unused main rate pool assets from 1 April 2021 for two years
- For example, if a company spends £100,000 on computer equipment then the company can claim a deduction of £130,000 against taxable profits
- With a corporation tax rate of 19%, this will lead to tax bills being cut by nearly 25p for every £1 of qualifying spend
What type of asset will qualify for the super-deduction of 130%?
- Capital investment in new and unused assets that qualify as main pool expenditure, subject to some specific exclusions (see below)
- This will include expenditure such as fire alarm systems, security systems, bathroom sanitaryware, carpets, computers equipment and servers, tractors, lorries and vans, ladders, drills and cranes, office desks and furniture, refrigeration units and electric vehicle charging points
- Companies can write off 50% of their expenditure on new/unused special rate pool assets in the first year. These would ordinarily qualify for 6% writing down allowances for expenditure in excess of the annual investment allowance (AIA)
- This 50% first year allowance (FYA) will also apply for 2 years from 1 April 2021
- Special rate pool expenditure includes heating and cold water systems, electrical systems, air conditioning, lifts, solar panels and thermal insulation to an existing commercial building
- There is no expenditure limit on either the 130% super deduction or 50% first year allowances
- Where a super-deduction is claimed, the balance of super-deduction expenditure added to the pool is nil (i.e. the company does not allocate a negative balance of expenditure to the pool because the balance was greater than the expenditure)
- A company incurring £2m of qualifying expenditure decides to claim the super-deduction
- As the company has spent £2m on qualifying expenditure it can deduct £2.6m (130% of the initial investment) in computing its taxable profits
- The company will save £494,000 on its corporation tax bill (being £2.6m at 19%)
- There are several cases where expenditure cannot benefit from these new allowances. These include:
- Expenditure is incurred in the chargeable period in which the qualifying activity is permanently discontinued
- Expenditure excluded from long life asset treatment by the ‘grandfathering provisions’
- Expenditure on the provision of plant and machinery for leasing. Note that the letting of a ship on charter or any other asset on hire is to be regarded as leasing for these purposes. HMRC have communicated to us that these exclusions will apply to landlords. Landlords, including property owning companies which lease property to other members of the same group, will not be able to benefit from the super-deduction or the 50% FYA. This does not prevent the landlord from claiming the annual investment allowance or writing down allowances where appropriate. This may lead to some group clients wanting to push expenditure down into the tenant company where historically it would sit in the landlord company.
- Claiming the super-deduction is incurred in connection with a change in the nature or conduct of a trade of business carried on by a person other than the person incurring the expenditure (only if claiming the super-deduction is one of the main benefits expected to arise from the change)
- The 130% super-deduction and 50% first year allowance only apply to new and unused plant and equipment.
- Guidance is yet to be provided in the capital allowance manuals, but HMRC guidance on ex-demo electric cars (which do not qualify for these new allowances but qualified for enhanced capital allowances) will qualify as new and unused. Similar rules may apply to the new allowances where demonstration kit is bought, but advice should be sought to clarify
- Assets acquired under finance lease are not typically eligible for capital allowances and therefore neither the super deduction nor 50% FYA will not be available
- Assets acquired under HP are treated as being owned by the company making the payments, even though title absolute may not pass until all payments have been made
- Capital allowances can only be claimed on all payments due to be made under the HP agreement when the asset has been brought into use
- For example, consider a company with a year end of 31 December 2021. It has paid £10,000 on deposit for an asset that is not delivered until January 2022 (i.e. post year-end). The balance of £90,000 is funded under HP and payments begin on delivery of the asset. In this case, the company would be able to claim the super-deduction on £10,000 of expenditure in the year ended 31 December 2021 and on £90,000 the following year
- The rules which provide for the postponement of FYAs on the provision of a ship does not apply to the super-deduction or 50% FYAs for special rate assets
- No, the AIA continues to exist alongside the new allowances
- The limit of qualifying expenditure for AIA remains at £1m to 31 December 2021. Thereafter the AIA is expected to fall to only £200,000
- For expenditure over these limits writing down allowances of 18% or 6% are available
- Expenditure on second-hand plant and machinery for instance can still benefit from AIA
- Care will need to be taken to consider the optimum capital allowances claim and impact of any potential clawback on sale
- Individuals and partnerships are entitled to 100% annual investment allowance (AIA) on qualifying expenditure
- With capital allowances being accelerated, this will lead to additional deferred tax being recognised by many companies
- The rate at which deferred tax will be recognised will increase, as the corporation tax rate is set to rise to 25% in April 2023
- When an asset has been sold on which the new allowances have been claimed the disposal receipts will be treated as balancing charges (taxable profits) instead of being taken to the pools. The treatment differs slightly depending on whether the super-deduction of 130% or the 50% FYA in respect of special rate pool expenditure was claimed
- In respect of the super-deduction of 130%, for example, if the company disposes of part of its fleet of lorries for £100,000 after 31 March 2023 the company will be subject to corporation tax on the full sales value in the year of disposal.
- It is worth noting that the 130% super-deduction on qualifying expenditure provides an effective tax saving of 24.7% on initial spend. The balancing charge after 31 March 2023 is due to be taxed at 25% so the company will effectively be saving tax at 25% on the net qualifying cost (original cost less disposal value) of main pool expenditure
- Special rules exist if the super-deduction asset is disposed of prior to 31 March 2023. The disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3. Where the disposal occurs in a period straddling 1 April 2023 a lower factor than 1.3 will be used. This rule does not apply to the 50% first-year allowances for special rate expenditure
- Where the enhanced deduction of 50% was claimed, then a balancing charge taken straight to taxable profits will be calculated in most cases on half of the disposal value. For instance, if the 50% FYA was claimed in respect of solar panels and they are sold for £100,000, the balancing charge would be £50,000 in the year of disposal. The remaining £50,000 would be deducted from the special rate pool
- Anti-avoidance rules already apply to counteract arrangements that are contrived, abnormal or lack a genuine commercial purpose
- Connected party transactions are excluded from first-year allowances
- Contracts cannot be cancelled and then put into place again after 31 March 2021 with a view of achieving the new super-deduction
- If the expenditure is incurred as the result of a contract entered in before 3 March 2021 then the deemed date of expenditure is the date of the contract
- This is regardless of whether or not there was an unconditional obligation to pay at that time under the terms of the contract
- There are anti-avoidance rules to stop companies cancelling one contract and then re-placing the order at a later date with the aim of seeking super-deduction
- It depends. The normal rule for identifying the timing of expenditure for capital allowance purposes is the date there is an unconditional obligation to pay it. Under the super-deduction rules, for the purpose of determining when expenditure is incurred, if a contract is entered into before 3 March 2021, the expenditure will be treated as incurred when the contract is entered into (whether or not an unconditional obligation to pay it arises on or after that date)
- If the contract is incurred from Budget day onwards, the answer may be different. Under most contracts there is not an unconditional obligation to pay for an asset until safe receipt of the assets in question. It will therefore be necessary to consider the precise terms of the sale in order to identify when the unconditional obligation to pay has been created
- The corporation tax rate will increase to 25% from 1 April 2023 for companies with profits over £250,000. Companies with profits up to £50,000 will pay corporation tax at 19% (provided they are not close investment holding companies), with marginal tax rates applying between £50,000 and £250,000.
- The rate of super-deduction will require apportioning if an accounting period straddles 1 April 2023. This is done on a time-apportioned basis.
- For example, if a company has a 12-month accounting period to 31 December 2023 the rate of relief would be:
90/365 x 30% = 7.4% + 100% = 107.4% for expenditure incurred in the period to 31 March 2023.
- Where a company incurs an additional VAT liability in a period that ends on or after 31 March 2023 there are special rules that allow the additional liability to qualify for the 130% super-deduction.
- We have established that the default rule for the date expenditure is treated as incurred is the date the buyer has an unconditional obligation to pay. However, there are exceptions to the rule. If under an agreement an amount of capital expenditure is not required to be paid until a date more than 4 months after the unconditional obligation to pay has come into being, the amount is to be treated as incurred on that later date.
- An anti-avoidance provision also applies where both the following conditions are satisfied:
- The obligation to pay an amount of expenditure under an agreement becomes unconditional at an earlier date than would be the case in a normal commercial contract.
- The sole or main benefit that might be expected to be obtained from it is that the expenditure would be treated as incurred in an earlier chargeable period or basis period.
For example, the company places an order for £50,000 of computer equipment in the last month of the financial year ending 31 March 2023. Normally there is not an unconditional obligation to pay until the goods are delivered in April 2023. The parties agree to vary normal commercial terms to bring the unconditional obligation into the year ended 31 March 2023 to try and secure the benefit of the super-deduction. In this case, the anti-avoidance rules would apply to treat the date of capital expenditure being incurred in April 2023 and the super-deduction would not be available.
- No, only expenditure that is treated as incurred prior up to 31 March 2023 can qualify. Special rules exist for milestone contacts when determining the timing qualifying expenditure.
- Under a milestone contract, the asset becomes the property of the purchaser as it is being constructed. The obligation to pay for a part of the asset that has been completed becomes unconditional when the work is certified. If the part of the asset which has been completed becomes the property of the purchaser before the company’s year end and the work is certified within one month of the year end, the expenditure which is certified is treated as incurred at the year end. If it is certified more than one month after the year end, then the expenditure is treated as falling in the next period.
- Further detailed advice should be sought where expenditure is being incurred under a milestone contract to maximise the expenditure eligible for the new allowances. A significant amount of the remaining expenditure is likely to qualify for structures and buildings allowance (SBA).
If you have any further questions on anything you have read here, please do not hesitate to contact one of us or your usual PKF Francis Clark adviser.