The Chancellor announced a substantial increase in the rate of Corporation Tax and a new Super Deduction capital allowance in his 2021 Budget
Corporation Tax will increase from 19% to 25% – though this wont take effect until 1 April 2023. Perhaps by way of a compensatory measure in the short term there was also a surprise temporary extension to capital allowances with the introduction of a Super Deduction of 130% for investment in new qualifying plant and machinery.
The temporary tax relief is available from 1 April 2021 to 31 March 2023 to companies incurring expenditure on qualifying plant and machinery. There is no cap on the amount that can be invested and claimed for. By claiming this allowance companies will save corporation tax of 24.7p for every £1 invested. Previously, these investments were eligible for an 18% annual writing down allowance so this is a particularly generous incentive for companies to invest or bring forward plans to do so. This, of course, is precisely what the government wants to happen as they seek to stimulate growth in the post covid economy.
The Super Deduction will have the greatest impact on large companies, given that most smaller ones will already have their entire capital expenditure covered by the Annual Investment Allowance (AIA). Large companies will also suffer higher corporation tax rates in the future and so this measure is likely to incentivise them to invest now rather than at a time when their AIA and other allowances are being relieved at a higher tax rate.
The Small Print
Lets take a look at some of the small print …
The investment must be for new assets. The super deduction cannot be claimed for expenditure on second hand assets
Qualifying plant and machinery
There is no definition in tax legislation of plant and machinery. Instead we must fall back on the common law meanings and a considerable body of case law. Generally speaking, plant and machinery is an asset that is used by a business for the purpose of carrying on the business and is not stock in trade or the business premises The difference between plant and machinery is that generally machinery will have moving working parts, and plant will not. Importantly, computers and other electronic devices are deemed to be machinery notwithstanding the fact that they may not have moving parts. It is also clear that cars do not qualify as plant and machinery but vans and commercial vehicles do.
1 April 2021 to 31 March 2023
The time limits are crucial. Expenditure contracted for before 3 March 2021 will not qualify for the relief even if the funds are actually spent in the allowance period. This is presumably because the tax relief is intended to promote new investment.
The Super Deduction is only available to companies paying corporation tax. It is therefore not available to sole traders and partnerships. But on a more positive note for sole traders and partnerships the Annual Investment Allowance increase to £1m has been extended to 31 December 2021. After this date it is set to fall back to £200,000.
If the Super Deduction is claimed then when the asset is sold the disposal proceeds have to be multiplied by 1.3 to calculate the balancing charge. Given that the rate of corporation tax is to increase to 25% there is a risk that the tax charge on the disposal proceeds might outweigh the tax relief obtained on purchase. It is therefore important to make an assessment on this point if the investment is in short life assets or there is an intention to dispose of them quickly.
HMRC have published a factsheet about the Super Deduction – this can be found by clicking here
Vertis Accounting are able to advise on all business accounting and tax matters. If you would like to discuss business tax matters in general or how your business can benefit from the Super Deduction please do get in touch – click here