One of the big ‘carrots’ of the 2021 budget was the new ‘super-deduction’. In broad terms this gives an immediate 130% tax allowance for investment in certain items of qualifying plant and machinery that meet all of the conditions. The key conditions here are as follows:
1. The expenditure must be incurred between 1 April 2021 and 31 March 2023 on new, unused plant or machinery.
2. This ‘super-deduction’ only applies for assets that otherwise qualify for the 18% main rate writing down allowance.
3. It does not apply to expenditure in the final year of trading.
4. It does not apply to expenditure on a car, most long-life assets, or plant and machinery used for leasing.
Given the fact that this ‘super-deduction’ will apparently end on 31 March 2023, it would seem sensible to consider accelerating significant capital expenditure to a time before this date. However, things are not so simple because (uncoincidentally) from 1 April 2023, a company which makes profits of £250,000 or more will be taxed at 25%.
Take a company with a 31 March year end. It has the option to buy a crane for £200,000 either in the year ended 31 March 2023 or in the following year. Excited by the prospect of the ‘super-deduction’ they opt for a 31 March 2023, investment. Although this will give rise to a £260,000 tax deduction, at 19% this is only worth £49,400. However, a 25% deduction of 100% of the cost expended in the following year would be worth £50,000. You may say “how can we be so sure of the 100% deduction?” and you are correct that this is not guaranteed. The £1m cap on the annual investment allowance was extended for another year in the recent budget, although it had been set to be limited to £200,000. We will learn more as time goes on.
Forbes Dawson view
The above example shows that it will not always make sense for a company to accelerate its investment in pursuit of the ‘super-deduction’. However, this does depend on a certain amount of faith (or information) that the current trend of annual investment allowance limits will continue. Furthermore, as the ‘super-deduction’ has no expenditure cap, the logic of the above example will not work for higher amounts of expenditure which will exceed the annual investment allowance after 31 March 2023. It is, however, surely no coincidence that 130% of 19% equates to the new corporation tax rate of 25% (it is actually 24.7%). The Government is clearly saying ‘Don’t wait until the corporation tax hike to invest. We will give you a higher rate tax deduction (or thereabouts) now!’.
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