All That Glitters is not Gold
The Budget, the Superdeduction and the Extended Loss Carry Back
On the face of it, the March Budget gave businesses several valuable new reliefs, to help cashflow and to incentivise investment through these (hopefully!) latter stages of the pandemic. For many businesses these will indeed be valuable, but think before you claim them, as the increase in corporation tax to 25% from April 2023 will have an impact.
The Plant & Machinery Superdeduction
The “superdeduction” will give companies (not unincorporated businesses – more on that later…) a Capital Allowance of 130% on their qualifying “main pool” plant and machinery expenditure. Pretty exciting stuff (for a tax adviser!). 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 separately, 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.
Example 1 looks at the effect of the change in tax rate and the balancing charge. As can be seen, upfront in 2021, the superdeduction is more beneficial than claiming under the AIA. However, if there was a substantial Capital Allowances pool to offset the balancing charge, then a claim this year under the existing AIA rules could actually be more tax efficient over the four year ownership period of the asset, as £6,250 of the £24,700 upfront saving under the superdeduction is clawed back because of the balancing charge, giving an overall saving of £18,450 compared to £19,000 under the AIA.
More stark is that if the expenditure is delayed until 2023 when the new tax rate comes in, then a claim under normal AIA will save more tax than the superdeduction even in year 1. This is because the higher corporation tax rate actually outweighs the 130% deduction. By the time a balancing charge is factored in, waiting for the AIA in 2023 looks much more generous.
What this really tells the cynic in me, is that having decided to pre-announce the rise in Corporation Tax rates, the Government realised that companies would be incentivised to delay their capital expenditure until April 2023; exactly the opposite of what they want to happen. The superdeduction is there to eliminate most of this effect, but for many businesses it will not be a reason to accelerate expenditure that they would not otherwise have been making. Of course what tax relief is really available after the end of the superdeduction will depend on what happens to the AIA between now and then, and whether your expenditure exceeds this and is only eligible to writing down allowances. Bigger businesses spending much larger amounts on plant and machinery may therefore still decide to accelerate expenditure. Some businesses may also have a limited plant and machinery pool so that the balancing charge point is not relevant.
So why hasn’t the superdeduction been made available to unincorporated businesses? Because no income tax rises have been announced, so there is no reason for unincorporated businesses to defer capital expenditure.
As a side note, if it takes the superdeduction to stop companies deferring their plant and machinery expenditure until the new tax rate, then there is still a possibility that companies may look to defer revenue expenditure until after April 2023 to gain higher tax relief. This is likely to become more prevalent as the date approaches. Accelerating income (bearing in mind accounting standards), may also become the order of the day.
50% First Year Allowance for Special Rate Pool Expenditure
Special rate pool expenditure, which would receive a lower level of writing down allowance of just 6%, is not eligible for the superdeduction. However, a 50% First Year Allowance will instead be available for a two year period from 1 April 2021.
This would cover items such as integral features in a building, including electrical installations, plumbing, heating and air conditioning etc.
Extended Loss Carry Back
Businesses can normally carry back trading losses to the preceding year. The temporary extended loss carry back allows both companies and unincorporated businesses to carry back remaining losses to the preceding three periods.
For Corporation Tax, the extended relief applies where the loss is made in a period ending between 1 April 2020 and 31 March 2021, or between 1 April 2021 and 31 March 2022.
For Income Tax, the extended relief applies where the loss is reportable in either the 2020/21 or 2021/22 tax years.
A £2m cap applies in respect of losses arising in each of those two periods, and losses must be used against the earliest years first. This is slightly unfortunate, as where both periods are loss making, one will often find that the earlier loss making period has used up all of the profits which might otherwise be available for the later losses.
For unincorporated businesses who are eligible, an extended carry back claim will almost certainly be the right thing to do in order to claim a refund as soon as possible. However, for companies, we must once again bear in mind the 2023 increase in Corporation Tax rates. In that case, some companies may find that by carrying the loss forward rather than using the carry back rules, they will relieve the loss at 25% rather than 19%, receiving a bigger refund. Of course, if cashflow right now is critical, then a refund may be preferable, even if it doesn’t give the best long-term result.
For groups of companies, the £2m cap applies across the whole group, and the nominated company will need to submit an allocation statement to HMRC.
However, a £200,000 deminimus threshold allows each company to claim up to that amount without being subject to the group cap or the allocation statement.
A claim will normally need to wait for the completion of the tax return for the loss making period. However, in cases where the loss can be proven to be large enough (for example, using management accounts), a claim up to the deminimus amount can be made at an earlier point in time.
Overall, the new reliefs are welcome temporary measures to help businesses through the current economic climate. However, they may not be as good as they initially appeared, and companies need to think carefully before making a claim or changing their investment plans.
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