SUPER DEDUCTIONS – ALL YOU NEED TO KNOW
Whilst the headline grabber of 130% for expenditure incurred on plant and machinery is very welcome, there are a number of watchouts in terms of this enhanced relief.
- It only applies to companies subject to corporation tax – partnerships and sole traders are not able to take advantage of this enhanced relief based on the draft legislation.
- It only applies to expenditure incurred between 1 April 2021 and 31 March 2023. Where expenditure is incurred as a result of a contract entered into before 3 March 2021, the normal capital allowances rules will not apply and the expenditure will instead be treated as incurred when the contract was entered into, effectively stopping any expenditure incurred as a result of a contract entered into prior to 3 March 2021 as qualifying for this super deduction.
- The 130% will only apply to plant and machinery which falls into the general pool.
- Expenditure that falls within the special rate pool, such as integral features and long life assets will qualify for a lower, but still beneficial, 50% First Year Allowance. Therefore, careful planning may allow some or all of the special rate expenditure to come within the £1m Annual Investment Allowance (AIA) prior to 31 March 2023 effectively giving 100% relief instead of 50% for this expenditure.
- The expenditure must be on new and unused assets, so not available for the purchase of second hand assets.
- The relief is not available to plant and equipment lessors.
- There is no cap on the amount of expenditure that can qualify for this relief, which will no doubt please the larger corporates investing in buildings and equipment that regularly spend in excess of £1m on qualifying assets per annum thereby exceeding the current AIA cap.
- Any subsequent sale of the plant and machinery where the super deduction is taken could be subject to a balancing charge equivalent to the amount of relief obtained, subject to transitional rules and the date of disposal.
- For expenditure incurred prior to 31 March 2023 but within an accounting period ending after 31 March 2023 there are adjustments made to the amount of the 130% relief that can be claimed – this is a real pitfall within the draft legislation, so I would encourage anyone to consider that impact when looking at the benefit of the super deduction. There may even be a case for extending or shortening the accounting period to end on 31 March 2023 to ensure no reduction of the Supper Deduction in that period!!!
Super Deduction for Landlords
An amendment was made so that the general exclusion does not prevent expenditure being qualifying expenditure for the 130% super-deduction and 50% first-year allowance if the plant or machinery is provided for leasing under an excluded lease of background plant and machinery for a building.
Background plant and machinery for a building would include the typical items a landlord would expect to install in a property. However, if landlords are installing, say, manufacturing equipment or storage equipment for tenants, there may be restrictions, so always consult with a capital allowances specialist to be sure!
Apparently more than one in five small and medium-sized businesses use asset finance or hire purchase when purchasing equipment so this is very relevant to our clients.
Can I claim super-deduction if I use asset finance?
There seems to be some confusion here.
In the draft super-deduction legislation, plant and machinery investment incurred under “a hire purchase or similar contract” will have to meet “additional conditions” to qualify for the super-deduction.
The implication is that the 130 per cent tax break excludes hire purchase or asset finance arrangements because the super-deduction only applies to “the person to whom [the equipment] is bailed or hired is the person who incurs the expense”.
However, the consensus appears to be that provided that these “additional conditions” are met, the condition ensure that the benefit of the super deduction goes to the business customer rather than the lender, and that does not mean hire purchase cannot be used.
Super-deduction additional conditions for asset finance
- that you are paying a periodical sum and in return plant and machinery assets are “bailed” (hired) to you
- that eventually you can end up owning those assets (such as by exercising an option to purchase or paying a fee)
- that the person who hires/receives the goods is the one incurring the expenditure (i.e. paying for the contract). This makes sure that the benefit of the deduction goes to the small business rather than the lender.
What can our clients do to be sure of a Super Deduction?
Don’t assume that an asset acquired under finance leasing will get the Super Deduction – the contract terms will need checking against the legislation to ensure that the Super Deduction claim is possible.
Freeports will provide a number of boosts to businesses, including simpler planning requirements, access to infrastructure funding, simplified customs procedures, National Insurance reliefs and tax breaks to build within the freeports.
The Chancellor announced 8 such locations including East Midlands Airport, Felixstowe & Harwich, Thames and Humber. The tax breaks come in the form of the following enhanced reliefs:
Enhanced Structures & Building Allowances – to provide a rate of relief of 10% per annum on a straight line basis, which is considerably higher than the 3% rate for the standard structures and buildings allowances that the rest of the UK will benefit from.
Enhanced Plant & Machinery Allowances – to provide a 100% relief in year one for expenditure on plant and machinery. As you would expect, there are clawback provisions if the equipment is not used within the freeport area for five years from date of acquisition or first use. This is effectively the new regional tax relief replacing the 100% Enterprise Zone Enhanced Capital Allowances (EZECAs). So, we’ll wait and see if the legislation applies to Special Rate Pool Expenditure as well as General Pool expenditure (which is the current thinking) – or only the General Pool expenditure, as was the case for EZECAs.
Full relief from SDLT – on purchases of land for commercial use within the freeport area.
Full relief from business rates – for all new businesses and certain existing businesses where they expand.
The tax reliefs will run from 9 March 2021 until 30 September 2026.
QUESTIONS? LET ME KNOW
If you’d like to find out more about the super deduction, freeports, or the other changes announced in the Budget, I’d love to chat.