The changes in the tax landscape for SME businesses

More specifically, the introduction of the “super-deduction”. This temporary measure is a “first year allowance (FYA)”, and has been designed to encourage capital investment in the UK.

What is the “super-deduction”?

On 3 March 2021, the Chancellor announced in the spring statement 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.

Partnerships and sole traders cannot claim this relief however they are still entitled to claim the annual investment allowance (AIA).

Tax relief is available on qualifying expenditure incurred between 1st April 2021 and 31st March 2023. Therefore, the timing of expenditure is crucial, and consideration will need to be given if there is a contract in place to purchase qualifying assets. The date when the contract becomes unconditional is generally the key stage for when the expenditure is incurred, for capital allowances purposes. So, if a company entered into an unconditional contract to buy the machine on 1st March 2023, but the machine was delivered and paid for on 30th April 2023 then this would not qualify for super-deduction. If the payment was made on 1 July 2023 instead, the date the expenditure is treated as incurred for capital allowances purposes is 1 July 2023.

The corporation tax rate is scheduled to go to 25% from 1 April 2023, but capital allowances are a deduction from profit which is apportioned across an accounting period. Thus, if expenditure is treated as incurred after 31 March 2023 and does not qualify for the super deduction, it is not certain that relief at 25% will be available on the full amount. Currently, there are no limits to the amount of qualifying expenditure that can attract for the super deduction. However, the AIA is scheduled to drop from £1m to £200k on 1 April 2023, and there are detailed calculations to undertake to assess how much AIA is available depending on the date expenditure is incurred if this is just before or just after 31 March 2023.

While the Government announced a review of capital allowances and incentives for capital investment in the Spring 2022 statement, we do not yet know what will be in place. Suggested changes could be an increase to the AIA to £500k, increases to rates of writing down allowance, the introduction of new first year allowances, or even the introduction of full expensing for qualifying plant or machinery expenditure.

Businesses now need to review their capital expenditure plans and liaise with suppliers on expected delivery times.

What assets qualify for the “super-deduction”?

Subject to the excluded assets mentioned below, generally anything that would qualify for plant and machinery allowances and would normally be added to the general pool (i.e. computer equipment, vans, office furniture, etc.) would qualify for the super-deduction.

In addition, any assets added to the special rate pool (solar panels, electrical and lighting systems, cold water systems etc) also qualifies for a special rate allowance.

All assets (whether general pool or special rate pool) must be new/unused.

What are the first-year allowance (FYA) rates for assets that qualify for the “super-deduction and special rate allowance”?

Any qualifying assets for the general pool can qualify for 130% FYA

Any qualifying assets for the special rate pool can qualify for 50% FYA

What assets don’t qualify for the “super-deduction”?

Not all assets qualify for this tax relief. Some of the more common exclusions are below:

• Cars
• Long-life assets (although this would qualify for 50% special rate allowance)
• Plant/machinery assets acquired for leasing (though background plant or machinery in a leased building can still qualify)
• Second-hand assets
• Assets purchased where there is a change in nature/conduct of trade and main purpose of which is to benefit from this tax relief.
• Plant/machinery assets used partly for qualify and non-qualifying activities

How does the “super-deduction” interact with the existing Annual Investment Allowances (“AIA”)?

Current legislation states that the AIA will remain at £1million until 31^st March 2023 after which it is scheduled to fall to £200k.  However, as noted above, a higher than £200k AIA threshold from 1 April 2023 may be contemplated by the government.

There is no limit of the amount “super-deduction” that can be claimed, whereas the time at which expenditure is incurred when the AIA rate reduces can mean significantly less expenditure qualifies for the AIA than might otherwise be thought, if an accounting period crosses the date of reduction in AIA threshold.

The “super-deduction” is addition to the AIA so companies can claim both, but it seems more obvious to claim the “super-deduction” for qualifying assets in priority to AIA as this gives 130% allowances, as opposed to 100% for AIA. However, there will be instances where an asset would only qualify for AIA (i.e. a second-hand machine) so it would be best to use AIA for that asset and “super-deduction” for the rest of the asset purchase in the year.

Benefits of this tax relief

• Net tax benefit of 24.7% - for assets that qualify for the super-deduction, taxable profits can be reduced by more than the costs of the assts. This results in a net tax saving of 24.7% on the cost of the asset.
• Corporation tax repayment – due to the higher rates of relief, companies may end up with a loss for corporation tax purposes which may in certain instances be carried back up to 3 years which could generate a corporation tax repayment for an earlier accounting period(s).
• Lower corporation tax liability – corporation tax liabilities will be lower as a result of higher capital allowances being claimed (AIA and super-deduction). If a taxable loss is generated and this is carried forward and offset against future taxable profits this could potentially save tax at 25% as this is the new rate of corporation tax for profits in excess of £250,000 from April 2023 for companies which are not close investment companies (the threshold may be lower for companies in a group.

Summary

This “super-deduction” tax relief is short-lived as it is not expected that this will be extended beyond its current end date of 31^st March 2023 so careful planning is key. So, if there are any big projects requiring the purchase plant and machinery or refurbishment works to undertake on your trading premises then it may well be worth considering doing this before the end of March 2023 in order to claim the super-deduction.

There is also some planning to do for companies who anticipate corporation tax losses as a result of capital allowances claims and whether to carry these back (to claim a refund) or carry them forward to benefit from relief at the higher rate of corporation tax that applies from 1 April 2023.

If you require any further help or advice on this matter please do not hesitate to contact your usual contact or Janine Levine who is a tax specialist in our SME team. Our capital allowance special interest group are on hand to assist with those complex/large spend matters.

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