The concept of the super-deduction, announced in the March Budget, is a novelty within the capital allowances rules, giving tax relief on more money than has been spent. So, for example, a company incurring costs of £10,000 in a given period may obtain tax relief in that period on £13,000.
So why the outburst of generosity at a time when the government is strapped for cash, almost as never before? Ostensibly, the idea is to encourage investment to help re-start the economy as we slowly emerge from Covid-19 lockdowns.
Increasing corporation tax rates
In reality, that is the truth but not the whole truth, as the super-deduction cannot be divorced from the coming hikes in corporation tax rates. If a company is thinking of spending £10,000 today, then without the super-deduction it would save £1,900 in corporation tax. The decision-makers could well be tempted to defer the expenditure until CT rates rise from 19% to 25%, in less than two years, so that the tax saving will instead be worth £2,500. At a time when the government wants us to spend, spend, spend, this is not the desired outcome. By offering the enhanced deduction now, the tax relief comes in at £2,470 (£10,000 x 130% x 19%), which will no doubt counter the temptation to wait in most cases.
Clawback
Linked to the CT increases is the question of clawback. Suppose that a company incurs £1 million of qualifying expenditure today, and then sells the asset in three years from now, receiving back the same figure. That is quite possible in the context of buying and later selling commercial property.
So relief at the outset would be £247,000, calculated as £1 million of expenditure, attracting the super-deduction of 130%, and with a corporation tax rate of 19%.
The clawback on sale could be as much as £250,000 (£1 million x 25%, being the new CT rate). Indeed, it could even be higher than that, as there will be a marginal CT rate for companies with profits between £50,000 and £250,000.
Of course, the company is still better off, having claimed the super-deduction, than it would be if it did not, but the fiscal generosity may be something of a mirage. In reality, too, a well-advised seller would be unlikely to incur such a severe hit on the sale, because vendors retain a degree of control over the sale proceeds figure used for capital allowances purposes.
Restrictions
The super-deduction is available for companies only, and solely for expenditure on brand new plant and machinery in the two years to 31 March 2023.
The various “general exclusions” that apply to first-year allowances apply here too. For example, the super-deduction is not available for the cost of cars, or for assets received by way of gift, or for assets bought from connected parties.
Property lessors
Another general exclusion for first-year allowances relates to plant and machinery for leasing (in contrast to annual investment allowances, which are not denied for leased assets). However, a late change put forward by the government is intended to relax this restriction to a limited extent. The relaxation will allow property lessors (if they operate through a limited company) to claim the super-deduction for certain “background” plant or machinery in leased buildings, where all other conditions are met. This category covers most landlord-provided fixtures, including lighting, computer networking, bathroom fittings, catering facilities, alarm equipment, and many other categories of asset (see SI 2007/303).
Practical approach
As ever with capital allowances, the general advice is to proceed with caution. The super-deduction is certainly valuable, and the extension to corporate property lessors is very welcome. But care is needed to ensure that the client’s best interests are protected. As always, a three-pronged approach is required: establish entitlement to claim, claim the maximum permitted by law, and protect the client at the point of sale. It should all be standard stuff, but there are plenty of pitfalls if insufficient care is taken.
