In 2021 the government introduced the “super-deduction” to encourage companies to spend money on capital equipment. However, it’s time-limited and is coming to an end on 31 March 2023. What do clients need to do to take advantage?
Recap
The super-deduction applies to companies only and in the two years to 31 March 2023. It allows your clients to access:
- an allowance of 130% on most new plant and machinery that would otherwise qualify for 18% main rate writing down allowances; or
- a first-year allowance of 50% on most new plant and machinery that would normally qualify for the 6% special rate writing down allowance.
- The effect of the first allowance is that tax relief will be obtained at 24.7% on qualifying expenditure, i.e. 130% x 19%.
Timing
There may be some confusion among clients whose year ends straddle 31 March. Where this is the case, the normal 130% rate is tapered down to 100%. For example, expenditure during an accounting year ending 31 December 2023 would qualify for a super-deduction at 107.4% (calculated as (30 x 90/365 days) + 100). However, that is not the end of the story.
Pro advice. To qualify for the super-deduction, your clients must incur the expenditure on or before 31 March 2023. For example, a client with a year end of 31 December 2023 won’t be able to incur £1 million of expenditure on 1 April 2023 and claim a deduction at 107.4%.
If the deadline is missed, the next best option will be to use the annual investment allowance (AIA) to offset the expenditure. This has now been set at a permanent level of £1 million, instead of falling to £200,000. But as the super-deduction has no upper limit, missing the deadline could be very costly for your clients.
Pro advice. Remember that the date expenditure is incurred on is the date that the obligation to pay becomes unconditional, and as long as the required date of payment is within four months, this can be earlier than the date payment is actually made. This can help clients secure relief now.
Example. Acom is looking to purchase capital equipment for £3m and wants to use the super-deduction. However, it won’t have the funds to pay for it until May 2023. If it enters into an unconditional contract by 31 March 2023, the expenditure can be treated as incurred on the date the contract is signed – as long as payment is required within four months. So, for example, Acom could sign a contract on 31 March 2023, stipulating full payment by a date no later than 31 July 2023. As long as the obligation to pay is unconditional at the contract date, the expenditure will then be treated as incurred on 31 March 2023 and the super-deduction can be claimed.
Pro advice. There are restrictions where the assets are acquired under a hire purchase agreement. Refer to CA11800 for further information about these rules (see Follow up ).
Worth claiming?
There are some extra considerations to keep in mind. In particular, the increased corporation tax rate from April 2023 means that relief under the £1 million AIA will be more valuable than in the year to March 2023. If the expenditure is less than £1 million it may be worth be worth waiting, as relief could be given at 25% (assuming the main rate applies), compared with 24.7%.
Pro advice. The saving will be even greater if the expenditure means the company pays tax at the small profits rate, or is in the marginal relief range. It will also be more beneficial if the accounting date means a super-deduction applied pro rata would apply.
The key to accessing the super-deduction is that your client must incur the expenditure on or before 31 March 2023. However, consider whether it would be more efficient to wait until after that date, utilising the annual investment allowance instead, as the effective rate of relief could be higher in the right circumstances.
Follow up
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.