QUESTION: I have read that the Chancellor announced a new Super Deduction Allowance for capital expenditure in his recent budget. What is this relief and how does it differ from existing capital allowance reliefs?
ANSWER: In his March budget, Chancellor Rishi Sunak announced that the UK rate of corporation tax was going to have to increase significantly from the current level of 19 per cent to a new level of 25 per cent with effect from April 1 2023.
Companies therefore have two years to prepare for this tax increase and those contemplating significant capital expenditure on new plant and machinery might therefore decide to defer their expenditure plans until after March 2023 so that they will get tax relief at 25 per cent instead of 19 per cent.
Mindful of this, the Chancellor has announced a Super Deduction First Year Allowance (SD FYA) which will complement the existing Annual Investment Allowance (AIA). AIA enables 100 per cent tax relief on the first £1m of capital expenditure and has been extended until December 31 2021.
How the SD FYA works is that it treats the company as having spent 30 per cent more on the capital expenditure than it actually has spent. Therefore, if a company buys a piece of equipment for £100k, it is treated as having spent £130K.
If you multiply £130k by 19 per cent, it equates to approximately £25k of tax relief and therefore by investing in plant and machinery now, the company is getting virtually the same tax relief as it would were it to defer its expenditure plans until April 2023. This is why the SD FYA has been introduced and it is only available to companies and not the self-employed.
As usual, nothing in the tax world is ever straightforward. The plant and equipment on which SD FYA has been claimed, must be separated within the company’s taxation computation and tracked individually as there is a clawback of the allowance on disposal and the amount of the clawback depends on when the plant and machinery is sold.
If it is bought and sold in the two year period April 30 2023, the disposal proceeds are increased by a notional 30 per cent. If it is sold after March 2024, the proceeds are the actual proceeds received. This means that this headline grabbing allowance may be significantly reduced in value given the complex disposal claw back rules. This would be particularly relevant for equipment with a short economic life.
The SD FYA can only be claimed for the purchase of new and unused assets and the normal date of deemed capital allowance expenditure applies, namely the date upon which there is an unconditional obligation to purchase the plant and equipment unless the actual payment date is more than four months after this date.
Given the fact that many businesses acquire refurbished or second hand equipment, this is how the AIA interacts with the SD FYA as plant and equipment incapable of qualifying for the SD FYA on the grounds that it is refurbished, can be claimed under the AIA rules up to December 31 2021.
Motor cars do not qualify, but vans and lorries do, and as the SD FYA is unlimited in terms of value (unlike the AIA which is capped at £1m), it is likely that businesses that have significant capital expenditure such as haulage companies, are likely to replenish their fleets over the next two years.
The SD FYA is a very valuable tax relief however, those companies planning a major capital expenditure programme should engage with their tax advisor prior to finalising capital expenditure plans so that any potential future clawback of the allowance can be mitigated.
:: Paddy Harty (p.harty@pkffpm.com) is a senior tax director at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
