Capital allowances super deduction – how it works

On 3 March 2021, to help with the economic recovery from COVID-19 pandemic, the Chancellor announced two new temporary first year allowances – the ‘super deduction’ and the ‘SR allowance’. Over many years, the government has used different types of capital allowance to boost business investment and businesses should look to make the most of these incentives.

What are the new allowances?

Both the super deduction and SR allowance give businesses investing in qualifying equipment a much higher tax deduction in the tax year of purchase than would otherwise normally occur – a ‘first year allowance’ (FYA). The allowances apply for capital investments made between 1 April 2021 and 31 March 2023.

These allowances will be available alongside the ongoing Annual Investment Allowance (AIA) which already gives 100% relief for costs of qualifying plant and machinery in the tax year of purchase. The AIA has been set at £1m per business again for the year to 31 December 2021.

The super deduction and SR allowance are only available to companies subject to corporation tax, not individuals, partnerships or LLPs, and only where the contract for the plant and machinery (including fixtures installed under a construction contract) was entered into after 3 March 2021 and expenditure is incurred after 1 April 2021.

What investments qualify for the super deduction and SR allowance?

Although not all business investments will qualify for the new allowances, the qualifying groups are quite wide:

• ‘Super deduction’ includes all new plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances
• ‘SR allowance’ covers new plant and machinery qualifying for the 6% special rate pool, including integral features in a building and long life assets. 

However, it is important to remember that certain assets do not qualify for the main pool (for example, cars  have their own capital allowance rates) and that second hand assets will just go into the pools as normal.

In addition, the new capital allowances do not apply to assets that fall into the relevant pools but are used for leasing. Therefore, expensive machinery acquired by hire businesses will not qualify. The leased plant and machinery exclusion from capital allowances does not extend to the provision of services that includes the leasing of plant and machinery. Examples would include serviced office providers and hirers of plant and machinery alongside dedicated operatives of that plant and machinery (for instance cranes and bulldozers with hired operatives). It will be important to consider the contractual arrangements entered into and whether plant and machinery is actually subject to a lease or not.

The initial details and draft legislation detailed that this leasing exclusion would also be extended to property investors, landlords and any groups with ‘PropCo’/‘OpCo’ structures that lease plant and machinery as part of a lease of property. So integral features or plant and machinery fixtures installed in a building that is let would not qualify for the new reliefs. However, a significant amendment was issue to the Finance Bill on 18 May 2021 to ensure that property lessors are not prohibited by the general exclusion on plant and machinery from leasing from claiming the super deduction or SR allowance in respect of background plant and machinery for a building. Background plant and machinery is generally plant or machinery within a building that might be expected in various building types which purpose is to contribute to the function of the building (e.g. lifts, heating and ventilation systems, electrical systems etc.). Therefore, subject to meeting the general conditions for super deduction and SR allowances, property lessors will now also be entitled to claim the enhanced reliefs.

How much tax relief can we get?

The super deduction gives relief at 130% of the qualifying cost compared to the usual 18% writing down allowance for investment in main pool plant and machinery assets. The SR allowance gives relief at 50% of the qualifying cost in the first year with the balance going into the normal special rate pool to be  written down at the usual 6% rate in future years.

For all companies that can claim it, the super deduction will be more beneficial than claiming the AIA for a main pool asset purchases. However, for smaller companies it may still be beneficial to claim the AIA in the first instance rather than the SR allowance on relevant assets, unless the total expenditure on special rate pool assets exceeds the AIA threshold of £1m.

The table below shows the effective rates of relief for the different claims but, as always, your capital allowance claims for each year will need to be compiled with care to ensure that your business gets the most optimised benefit overall.

How much can we invest under the super deduction and SR allowance?

Unlike the AIA, there is no limit or cap on the amount of capital investment that can qualify for either the super deduction or the SR allowance.

Super deduction, SR allowance and disposals?

Expenditure that qualifies for the new FYAs, main pool and special rate plant and machinery, is determined in the same way as before; the new first year allowances operate to accelerate the rate at which tax relief is realised rather than broadening what qualifies for plant and machinery allowances.

The disposal values for plant and machinery claimed as either the super deduction or SR allowance are also arrived at in the same way, in accordance with the Capital Allowances Act 2001.

A key difference is that while the disposal value is arrived at in the same way when the asset is sold, the amounts incurred on plant claimed as either ‘super-deduction’ or ‘SR allowance’ is automatically a balancing charge. The main and special rate pools are not adjusted for the FYA disposal values. If this disposal occurs after 1 April 2023, then the charge is subject to 25% corporation tax rate, whilst the original relief was given against the current 19% corporation tax rate.

If the disposal takes place before 1 April 2023, a special balancing charge calculation is needed for assets on which the super deduction was previously claimed: in simple terms, the disposal value for the year of sale is 1.3 times the sale proceeds of the asset. Where a chargeable period commences before 1 April 2023 and the disposal takes place after 1 April 2023 within in that chargeable period a factor based on the number of days before/after the relevant date is required. For any disposals for chargeable period that commence after 1 April 2023 the factors does not apply,  as in most instances the balancing charge will be subject to a higher corporation tax rate of 25%. Considerations are also required in relation to disposals of assets that have qualified for the SR allowance.

Therefore, even though assets claimed as either super deduction or SR allowance do not enter the main or special rate pool at purchase, businesses must track all super-deduction and SR allowance assets until they are disposed of to ensure that the correct disposal value and balancing charge is applied.

It is important to note that as disposal values are calculated in the same way, it will be possible to use a CAA 2001 s198 election as an alternative disposal value for fixtures that qualified and are claimed as a super deduction or SR allowance. For sellers of fixtures that have been claimed under these new first year allowances, the balancing charge realised would be heavily mitigated - potentially as low as £1 or £2, or lower still where only part of the cost of the plant and machinery has been claimed under the new temporary first year allowances.

What about losses and the super deduction and SR allowance?

As with all capital allowances, if the full deduction cannot be used by the business to set against its profits, a loss will be created which can be carried forward (or back under the new temporary three year loss carry back rules). It is also possible for all or part of the allowances to be disclaimed (so that the balance goes in to the main pool to carry forward to future years) but this is unlikely to be the most tax-efficient option.

With the main rate of corporation tax going up to 25% from 2023, deciding on the most tax-efficient mix of capital allowance claims and loss claims for 2021/22, 2022/23 (and 2020/21) may be complex: businesses may need to balance current cash flow needs against the wish to get the most tax relief. Such considerations are likely to require careful forecasting of future profits, losses and capital investments to ensure that your business makes the right decisions.
 

Get in touch with the team

Are you planning to make use of the super deduction or the SR allowance? Our experts will advise and guide you how to optimise your investments and claims.
 

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