Is a ‘super deduction’ the boost your business needs? – a view from the Central South
The answer appears to be a resounding yes from the 73% of Central South respondents to our recent BDO Rethinking the Economy survey who are now planning capital investment as a result of this new capital allowance. 50% of businesses have now decided to bring forward their capital spend to take advantage of the tax benefits that the government have offered to help kick-start the economy as we move through the pandemic. This is the highest response of any region in the UK, demonstrating local business confidence, and backing the government’s policy of unlocking capital investment which led to the legislative changes. So, what is this ‘super deduction’?
How the super deduction allowance works
The ‘super deduction’ for qualifying plant and machinery that gives tax relief at 130% of the cost in year one with no limit on the amount of investment. This is a generous relief, potentially giving back up to 25p in the £1, but there are qualifications as well as practical points that need consideration - ideally before capital investment is made. There is also another new ‘SR allowance’ that gives 50% relief, mainly for integral fixtures and long life assets in year one, with the balance written down at 6% each year within the special rate pool.
What’s the time frame?
The allowances apply for expenditure made between 1 April 2021 to 31 March 2023 by companies subject to corporation tax, so businesses will want to plan their spend during this period. The reliefs do not apply to certain assets, most notably, second hand assets, assets that do not qualify for the main pool (such as cars) and assets used for leasing, which is a complex area in itself. Interestingly, there has very recently been a ‘U-turn’ for property lessors, company landlords and group property companies, who can now potentially claim for “background plant & machinery” (e.g. lifts, heating, ventilation, electrical systems etc). It is worth mentioning that the Annual Investment Allowance still applies and, even though it would seem a less favourable relief on the whole (100% relief on cost up to £1m), the interaction between the two will still need to be considered.
Are there any downsides?
There will be administrative requirements associated with the new reliefs, especially when disposing of assets that have been subject to the super deduction or SR allowance. In such cases, the relevant assets should be identified, tracked and a separate balancing charge arises when the asset is sold, which could be subject to the new 25% tax rate. Furthermore, assets subject to the super deduction will apply a 1.3 uplift to proceeds if disposed of before 1 April 2023. The complexity can increase further for fixtures where certain elections are made to set the disposal value.
A further point to make is that the new allowances claimed can result in tax losses that can either be carried back and relieved at 19% or carried forward at 25%. Therefore, tax cash flow considerations should be factored into any modelling of current and future capex, profits and cash flows.
Increased capital investment in the Central South region, partly driven by the new tax reliefs, is a promising step, in particular it could benefit our manufacturing and technology sectors locally. It will be interesting to see whether the survey results follow through and higher business investment becomes a barometer of the region’s economy over the next couple of years. More detail on the allowances can be found here or please contact me direct [email protected].