New Superdeduction tax relief

by Barry Gostling

We certainly do live in ‘interesting times’ when central banks start to talk about the possibility of negative interest rates and governments start to give tax allowances on more than the cost of asset purchases.

However, this is what the Chancellor did in his most recent Budget when he unveiled the ‘Superdeduction’

The “superdeduction” will give companies (not unincorporated businesses) a Capital Allowance of 130% on their qualifying expenditure.  This is much better than writing down allowances at 18%, and still an improvement even if you were able to claim a 100% deduction under the Annual Investment Allowance (AIA).

With a corporation tax rate of 19%, this means that a profitable company spending £100,000 on new machinery would find it only costs them £75,300, whereas under the AIA it costs them £81,000 (Note: the temporary £1m AIA has been extended until 31 December 2021, before it is, theoretically, due to revert to £200,000 per annum).

There are restrictions to think about:-

  • The relief will only be available for expenditure incurred from 1 April 2021 until 31 March 2023. Apportionments apply for periods that straddle 31 March 2023;
  • Any expenditure under a contract entered into before 3 March will not be eligible;
  • Only new assets are eligible; second-hand purchases will not qualify;
  • The relief will not apply to cars, long-life assets, assets for leasing out, in the period of cessation, or in certain tax avoidance scenarios.

All well and good, but what’s the catch?

Ordinarily, when an asset is disposed of that has been subject to a Capital Allowance claim, the disposal price is deducted from the Capital Allowances pool (the residue of Capital Allowance expenditure on which writing down allowances are claimed each year).  It is only if that pool has been exhausted that a balancing charge will be crystallised; taxing so much of the disposal value as exceeds the pool.

With the Superdeduction, the expenditure will need to be kept separate, so a balancing charge will always arise on disposal.  But of course, chances are the disposal will take place after the rise in corporation tax, and the balancing charge will be taxable at 25%.  If it doesn’t, then the balancing charge will be multiplied by a factor of up to 1.3 to reflect the additional tax relief claimed on acquisition.

Practical Impacts

So what practical implications could this new Superdeduction have for LATCo’s?

Perhaps one of the most obvious will be the decision as to whether to purchase or lease new assets.  In particular those that will have a low residual value at the end of their time with you, such as commercial vehicles or hard working tools.

In cashflow terms, through using Hire Purchase contracts, for example, you can often achieve very similar cash outflows for a purchase as compared to a lease. However, with the new Superdeduction the lease premium will continue to attract 100% tax relief but the capital HP payments will in effect achieve 130% deduction with all of that relief coming at the very start of the HP contract.

As a result it could mean that unless leasing companies respond to this change and amend their pricing  it could be cheaper to purchase certain assets than lease them although of course each potential contract would need consideration in its own right prior to reaching that conclusion.

Author

Barry Gostling

View Biography