In the Spring Budget 2021, the UK government introduced two temporary first-year allowances, known as the ‘Super Deduction’ and ‘SR Allowance,’ to assist in the economic recovery from the Covid-19 pandemic. However, as of 1 April 2023, the ‘Super Deduction’ has been removed and replaced with a new temporary allowance called ‘Full Expensing,’ as announced in the Spring Budget 2023.
While the super deduction scheme has ended, it remains important to understand its potential relevance in certain situations. Let’s begin!
Defining Super Deduction
The Super Deduction allows companies subjected to corporation tax to claim a 130% tax deduction on qualifying capital expenditures used for business purposes. This means that for every £1 of qualifying expenditure, the company can deduct £1.30 from their taxable profits.
If a company purchases a qualifying machine for £100,000 which qualifies for Super-Deduction, they can deduct £130,000 as a capital allowance from their taxable profits, saving a corporation tax of £24,700 (calculated at 19%).
Conditions
The following conditions must be met to claim 130% super-deductions.
- Plant and machinery expenses must be new and unused.
- Expenditure must be incurred between 1 April 2021 and 31 March 2023 and contract entered after 3 March 2021.
- The allowance is applicable only to companies within charge to corporation tax, not for sole traders or partnerships.
- The allowance is available only to plant and machinery falling within the main rate pool, which attracts a writing down allowance (WDA) of 18%.
Exclusions
Super deduction cannot be claimed on:
- used and second-hand plant and machinery expenses.
- expenditure incurred before 1 April 2021 and after 31 March 2023.
- contract entered before 3 March 2021.
- expenditure on plant & machinery incurred for leasing purposes.
- assets acquired as gifts.
Note: Even though super-deduction is not available for the plant and machinery used for leasing purposes, the fixtures used in a mixed lease with a building qualify.
Assets that qualify for Super Deduction
Super deduction applies to qualifying plant and machinery assets falling within the main rate pool, which includes a wide range of equipment and tools that are used for business purposes. This can include:
- Solar panels
- Fire alarm systems
- Security systems
- Carpets
- Computer equipment and servers
- Office desks and furniture
- Refrigeration units and many more.
Did You Know ?
There is no limit on the amount that can be claimed under Super Deduction unlike Annual Investment Allowance (AIA).
Reduced Super Deduction
A reduced super deduction rate may apply instead of 130% if the company incurs qualifying expenditure in the chargeable periods spanning 1 April 2023.
In such cases, the relevant % is determined as follows:
- Step 1: Divide number of days in the chargeable period falling before 1 April 2023 by 365
- Step 2: Multiply the outcome by 30%
- Step 3: Add 100% to the outcome
Note: In step 1, if the chargeable period is shorter than 12 months, the total number of days in that period is used instead of 365.
Let’s understand with an example,
XYZ Ltd prepares accounts for the year to 31 October 2023. The company purchased a solar panel on 1 December 2022. The relevant percentage for the super-deduction is calculated as:
- Step 1: No. of days before 1 April 2023 = 152/365 days
- Step 2: 152/365 * 30% = 12.5%
- Step 3: 12.5% + 100% = 112.5%.
Therefore, the reduced super-deduction rate is 112.5%.
The below-reduced rate of super-deduction will apply to company with the following accounting period ended:
|
Chargeable accounting period ended |
Relevant % of super-deduction |
|---|---|
|
31 March 2023 |
130% |
|
30 April 2023 |
127.6% |
|
31 May 2023 |
125% |
|
30 June 2023 |
122.6% |
|
31 July 2023 |
120% |
|
31 August 2023 |
117.5% |
|
30 September 2023 |
115% |
|
31 October 2023 |
112.5% |
|
30 November 2023 |
110% |
|
31 December 2023 |
107.4% |
|
31 January 2024 |
104.9% |
|
29 February 2024 |
102.6% |
|
31 March 2024 |
0% |
Disposal Rules under Super Deduction
The disposal proceeds cannot be set against the reducing pool value. Instead, a balancing charge (taxable profits) for the period of disposal must be calculated.
Hence, it is important for companies undertaking property businesses that have claimed Super Deduction to maintain separate records until the asset is disposed of.
For Example,
Suppose P Ltd purchased a new machine for £100,000 and claimed £130,000 under the Super Deduction.
If they sell the asset for £58,000 in the accounting period ending 31 December 2025, a balancing charge equivalent to the disposal proceeds of £58,000 will be added to the company’s taxable profits.
What if the disposal proceed EXCEEDS the original cost of the asset?
There is no cause for concern because the balancing charge, which is a negative capital allowance, would still be limited to the original cost of the asset.
Super Deduction Capital Allowances Claim after 31 March 2023
If the qualifying capital expenditures are incurred between 1 April 2021 and 31 March 2023 and qualify for super deduction, then the companies undertaking property business can still claim the expenditure after the deadline.
Moreover, the super-deduction will continue to form part of capital allowance reviews until 31 March 2025, which means that the companies can amend and resubmit tax returns where it is applicable.
Conclusion
As super deduction tax relief is still relevant, it’s advisable to retain all necessary documentation to support a claim for it.
Therefore, it’s essential for companies undertaking property businesses to have a thorough understanding associated with claiming the super-deduction. This can help minimise the potential risks and stress that may arise in the event of an HMRC investigation.
