What should be on your 2023 business checklist?
17/01/23. What should business leaders have on their New Year checklists in 2023?
The end of super deduction
20/01/2023. The super deduction was introduced from April 2021 and was scheduled to run for two years, its main purpose was to encourage companies to continue/expand capital expenditure, as corporation tax rates were also scheduled increase to 25% and there was a fear that companies would pause capital expenditure in preference of higher tax relief in two years time.
Details of the relief can be found in our previous article here.
Summary
- The super deduction is a first year allowance of 130% on the purchase of certain qualifying assets.
- It is only available to companies
- It was first introduced in April 2021 and is due to end on 31 March 2023
- Transitional arrangements are in place for year ends that span the end date.
- Planning to maximise benefit is essential
Example 1
| Tax relief on expenditure with super deduction and tax rate of 19% | £1000 x 130% x 19%= £247 tax relief |
| Tax relief on expenditure with no super deduction and tax rate of 25% | £1000 x 25% = £250 tax relief |
However, the super deduction was also introduced to encourage capital expenditure and gave a generous first year allowance (i.e. full deduction) for all qualifying expenditure in the year of purchase with no limit on the overall amount expended.
Therefore, where there is a large capital spend, greater than the annual investment allowance of £1m (which provides a full deduction for expenditure in the year of purchase), a valuable cash flow advantage can be obtained if the super deduction is available.
Coming to an end
Like all good things, they must come to an end and the super deduction (at the time of writing) will end on 31 March 2023. For companies with a year end of 31 March, this will be a straightforward process – with the final year of availability being the year to 31 March 2023.
For companies with a year end that spans 31 March 2023 transitional arrangements are in place and are explained in more detail below.
Transitional arrangements
Where a company’s year end spans the 31 Mach 2023 cut off, the 30% uplift is prorated by the number of days pre/post 31March 2023.
Example 2: a company with a December 2023 year end
Number of days pre 31 March 90 days
Number of days post 31 March 275 days
Total days 365 days
Therefore, the uplift amount will be 90/365 x 30% = 7.4% making a total deduction of 107.4%.
Planning
Timing is everything…
There are specific rules in the capital allowances act that specify the timing of expenditure and these should not be ignored. Generally, expenditure is classified as incurred when there is an unconditional obligation to pay. This is not defined in legislation but HMRC consider delivery of the asset as giving rise to the unconditional obligation, subject to the payment being made within a four months of the unconditional obligation arising.
There are also anti avoidance provisions to consider and which stop the creation of an earlier unconditional obligation where this would not reflect usual commercial terms.
Small and margin companies
Small – profits < £50k – tax rate 19%
Margin – profits > £50K but < £250K – tax rate of between 19% and 25%
In example 1 above, it can be shown that there is little advantage in delaying capital expenditure due to the increased tax rate of 25%. However, from April 2023 there will be a small and marginal corporation tax rate of 19% for small companies and in between 19% and 25% for marginal companies (the calculation of the marginal rate is not covered in the article).
In this scenario there is an absolute benefit in accelerating capital expenditure before the super deduction ends, as tax relief will fall for these companies after 31 March 2023.
Large companies
Profits > £250k – tax rate 25%
As shown in example 1, there is little advantage in accelerating capital expenditure in terms of the ultimate amount of tax relief available. However, there is a cashflow advantage where capital expenditure (greater than the annual investment allowance) is anticipated.
As noted above, the super deduction is a first year allowance that gives a full deduction for qualifying expenditure. If the super deduction is not available and normal capital allowances rates apply then, subject to the availability of the annual investment allowance, the tax relief is spread over a number of years.
Example 3: Qualifying Plant and machinery spend of £1m (in excess of the annual investment allowance) with 31 March year end.
| Amount of allowance in year of purchase | ||
| Accounting period ending Pre 31 March 2023 | Tax relief on expenditure with super deduction and tax rate of 19% | £1,000,000 x 130% x 19%= £247,000 tax relief |
| Accounting period beginning Post 31 March 2023 | Tax relief on expenditure with no super deduction, main pool writing down allowance applies and tax rate of 25% | £1,000,000 x 18% x 25% = £45,000 tax relief |
In the above example the remaining tax relief for post 31 March expenditure is spread using a 18% reducing balance basis, writing down allowance. Ultimately, in the fullness of time, full tax relief is obtained but is spread over a number of years.
Alternatives
The government is consulting on alternative measures to continue to encourage and support capital expenditure with some suggestions being:
| Writing down allowances (WDAs) | An option is to increase the rates of WDAs from 18% and 6% to, for example, 20% and 8% |
| First year allowances (FYAs) | An option is to introduce general FYAs for qualifying expenditure on plant and machinery, for example a 40% FYA for expenditure on main rate and a 13% FYA for expenditure on special rate plant and machinery. |
| Additional first year allowance (similar to super deduction) | An option is to introduce an Additional FYA, for example at 20%, with a further 100% relief given over time through writing down allowances |
| Full expensing | An option is to introduce full expensing of main rate plant and machinery and a 50% FYA for special rate plant and machinery. These allowances could be targeted at particular types of capital investment (for example those which are beneficial for the environment). |
However, at the time of writing and with the exception of the annual investment allowance being maintained at £1m, none of these proposals have been enacted and only remain as potential benefits at some future point.
How can we help
We have a team of specialists who can assist you with planning for capital expenditure, making the most efficient use of available reliefs and maximising the available claims. We have also developed specialist technology, which can improve the level of claim by identifying qualifying costs and crucially, delivering significant additional benefit to our clients.
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What is the super deduction?
On 3 March 2021, the Chancellor announced a temporary change to tax relief which allows companies to claim enhanced capital allowances on qualifying plant and machinery assets. This new relief will allow companies to save up to 24.7p in corporation tax for every £1 of investment in plant and machinery in the year of expenditure.
19 September 2024
R&D tax relief FAQs
Navigating the complexities of R&D tax relief can be complicated. If you’ve got a question, chances are we’ve heard it before. Here we share some of the most frequently asked questions about R&D tax relief.
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