Budget 2021: Capital Allowances and the new super-deduction

As part of the Budget 2021, the Chancellor, Rishi Sunak, announced a new capital allowance ‘super-deduction’ and first year allowance. The hope is that these will provide companies a stronger incentive to make qualifying investments and bring forward planned investments for future years.

The Relief

For expenditure incurred between 1 April 2021 and 31 March 2023, companies can claim a super-deduction in the form of a first-year relief of 130% on new plant and machinery fixed assets. This would usually qualify for 18% writing down allowances.

 

Similarly, for expenditure incurred between 1 April 2021 and 31 March 2023, companies can claim a first-year relief of 50% on new plant and machinery fixed assets which would usually qualify for 6% writing down allowances.

 

Where the asset is disposed of before April 2023, an additional balancing charge will arise to recoup the additional super-deduction claimed.

Who can claim the relief?

The ‘super-deduction’ is only for companies, it is not available to individuals trading as sole traders or in professional partnerships.

 

The relief is not available to those undertaking a leasing business. The definition of a leasing business will also include property investors and businesses that operate under a “PropCo/OpCo” structure.

 

However, HMRC have indicated that they may not apply the leasing restriction to property companies in respect of communal plant provided by the landlord to multi-let buildings. There may also be entitlement to the super-deduction for landlord capital contributions towards tenant fit-out plant & machinery. We await further details on these points.

Is there a limit on the level of spend?

There is no expenditure cap on either of the two reliefs and no limit on the amount of deduction.

 

The capital allowances arising will be deducted in computing a company’s tax adjusted trade profits as normal. If this results in an increase in the company’s tax losses, these can be relieved as usual. This includes being carried back against profits of the previous 3 years under the new temporary extension to the carry back of trading losses.

What are the qualifying investments?

In order to benefit from the 130% relief, the investment would need to qualify as a main rate pool addition, which would ordinarily be written down at 18%. To benefit from the 50% First-Year Allowance (50% FYA), the investment would need to qualify as a special rate pool addition, which would ordinarily be written down at 6%.

 

Expenditure under a contract entered into before 3 March 2021 is not eligible for the super-deduction of first year allowance. The associated expenditure is treated as being incurred on the date the contract was entered into and expenditure incurred before Budget Day doesn’t qualify.

 

Similarly, the reliefs do not apply to plant and machinery that is used or second-hand. The expenditure must be ‘new’ expenditure. The purchase of a property that already includes plant and machinery within it will therefore not qualify, as the plant and machinery expenditure will be deemed to be second hand. 

 

There is no exhaustive list of which investments would qualify as a main rate pool expenditure or as a special rate pool expenditure. Below is a summary of the some of the typical assets which would qualify for each relief:

 

 

Qualifying Assets
Qualifies for 130% super-deduction	Qualifies for 50% First-Year Allowance
Tractors, lorries and vans (not cars)	Lifts, escalators and moving walkways
Computers, laptops and printers	Space and water heating systems
Ladders, drills and cranes	Air-conditioning and air-cooling systems
Toilets and kitchen facilities	Hot and cold water systems
Office chairs, desks and monitors	Electrical systems, including lighting
Furniture and machinery	External solar shading

 

Impact of New Reliefs

Example 1:

 

X Ltd spends £10m on assets that would qualify for the super-deduction.

 

Scenario 1: Expenditure pre 1 April 2021
	£
£1m AIA claimed	1,000,000
Balance of £9m written down at 18% p.a.	1,620,000
Total Deduction in the First Year	2,620,000
Tax Saving @ 19%	497,800

 

Scenario 2: Expenditure between 1 April 2021 and 31 March 2023
	£
130% Super-deduction claimed	13,000,000
No balance left to write down	Nil
Total Deduction in the First Year	13,000,000
Tax Saving @ 19%	2,470,000

 

While the corporation tax rate remains at 19%, every £10,000 of investment spent on assets qualifying for the super-deduction will reduce the corporation tax liability in the first year by £2,470.

 

Example 2:

 

Y Ltd spends £10m on assets that would qualify for the 50% FYA.

 

Scenario 1: Expenditure pre 1 April 2021
	£
£1m AIA claimed	1,000,000
Balance of £9m written down at 6%	540,000
Total Deduction in the First Year	1,540,000
Tax Saving @ 19%	292,600

 

Scenario 2: Expenditure between 1 April 2021 and 31 March 2023
	£
50% First-Year Allowance claimed	5,000,000
Total Deduction in the First Year	5,000,000
Tax Saving @ 19%	950,000

 

The remaining £5m will be added to the special rate pool from the following year and written down at 6%.

How does the Super deduction interact with Annual Investment Allowance?

It was announced at Budget 2021 that the Annual Investment Allowance (AIA) will remain at £1,000,000 until 31 December 2021, reverting back to £200,000 on 1 January 2022.

 

A company cannot claim AIA and a super-deduction on the same amount of qualifying expenditure, thus in most cases it would make sense to prioritise the super-deduction where possible. However, it is important to note that the AIA could be useful in scenarios where the super-deduction is not available, for example contracts completed prior to 3 March 2021, expenditure incurred prior to 1 April 2021 or certain assets purchased used or second hand.

 

The interaction between AIA and the 50% FYA is not as straight-forward, with the basic rule being that AIA and the 50% FYA cannot both be claimed on the same qualifying expenditure. Care will need to be taken to consider the optimal capital allowances claim and the significance of any potential liability on the disposal of the assets as this will vary depending on the level of qualifying expenditure. 

Disposal of Qualifying Assets

When an asset on which a super-deduction was claimed is disposed of, the disposal receipts will be subject to a capital allowance balancing charge.

 

If the disposal occurs in a chargeable period that ends before 1 April 2023, the balancing charge is equal to the disposal value multiplied by the relevant factor of 1.3, so it is 130% of the expenditure disposed of, matching the initial super-deduction. If the chargeable period straddles 1 April 2023, the relevant factor is apportioned based on the number of days in the period before 1 April 2023.  If the disposal occurs in a chargeable period that commences on or after 1 April 2023, the balancing charge is equal to the disposal value.

 

This is summarised in the example below.

 

Example 3:

 

Z Ltd spends £9m on assets that would qualify for the super-deduction. The assets were disposed of for £3m.

 

Scenario 1 : Disposal in chargeable period that ends before 1 April 2023
	Year ended 31 March 2023 (£)
Disposal Value	3,000,000
Balancing Charge [3,000,000 x 1.3]	3,900,000
Tax Impact @ 19%	741,000

 

 

Scenario 2: Disposal in chargeable period that straddles 1 April 2023
	Year ended 31 December 2023 (£)
Disposal Value	3,000,000
Relevant factor: [(90/365 x 0.3) + 1]	1.075
Balancing Charge [3,000,000 x 1.075]	3,225,000
Tax Impact @ 23.5% [19%*3/12+25%*9/12]	757,875
Scenario 3: Disposal in chargeable period that commences on or after 1 April 2023
	Year ended 31 March 2024 (£)
Disposal Value	3,000,000
Balancing Charge	3,000,000
Tax Impact @ 25%	750,000

 

Similarly, when an asset which a 50% FYA was claim on is disposed, the balancing charge is based on a proportion of the disposal value. The proportion is calculated as equal to the qualifying expenditure which was subject to a 50% FYA claim divided by 2 and then dividing that amount by the total amount of relevant expenditure. The total amount of relevant expenditure is equal to the total of relevant 50% FYA expenditure, any expenditure in respect of which any other first-year allowance was made and any expenditure in relation to the asset that was not included in a 50% FYA claim.

 

The example below summaries the impact of a disposal of 50% FYA assets.

 

Example 4:

 

W Ltd spends £5m on assets that all qualified for the 50% FYA. The assets were disposed of for £2m.

 

Disposal in chargeable period that ends before 1 April 2023
	£	£
Disposal Value		2,000,000
Expenditure subject to 50% FYA	5,000,000
Total Relevant Expenditure
Relevant 50% FYA expenditure	2,500,000
Expenditure in respect of which any other FYA was made	Nil
Expenditure allocated to the pool	2,500,000
	5,000,000
Proportion of disposal value ((5,000,000 / 2) / 5,000,000)		50%
Balancing Charge (2,000,000 x 50%)		1,000,000
Tax Impact @ 19%		190,000

 

If the disposal occurs after 1 April 2023, the change of the corporation tax main rate will need to be considered.

 

Effectively this is a clawback of the relief already received in the first year of investment. As a result, it will be important to keep a record for each qualifying asset to ascertain the balancing charge.

Conclusion

Overall the new allowances provide an attractive incentive for businesses looking to making capital investments in the short-to-medium term. If you would like to discuss any of the points further or how these changes might affect you and how we may be able to assist, please contact your usual Crowe advisor.