SUPER DEDUCTION – HOW SUPER IS IT?
I’ve been speaking to plenty of businesses and capital allowances experts alike about a point of potential confusion in the Spring Budget: the ‘super deduction’.
While the headline grabber of 130% for expenditure incurred on plant and machinery is very welcome, there are a number of things to watch out for with this enhanced relief:
1) It will only apply to companies subject to corporation tax – partnerships and sole traders will not be able to take advantage of this enhanced relief based on the draft legislation.
2) It will only apply 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.
3) 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 December 2021, effectively giving 100% relief instead of 50%.
4) The expenditure must be on new and unused assets, meaning it will not be available for the purchase of second-hand assets.
5) Based on current draft legislation the relief is not likely to be available to commercial landlords and plant and equipment lessors, due to a recent change in the legislation. We will have to see if this was unintentional and is amended in the final version or not.
6) It is not available for expenditure on cars.
7) There is no cap on the amount of expenditure that can qualify for this relief. News 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, exceeding the current AIA cap.
8) Any subsequent sale of the plant and machinery where the super deduction is taken could face a balancing charge equivalent to the amount of relief obtained, subject to transitional rules and the date of disposal.
9) 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 super deduction in that period.
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. Drop me a message at firstname.lastname@example.org
Jeremy Chapman | Capital Allowances Director