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  • Katherine Bullock

Temporary First Year Allowances – the rise of the Super Deduction



In addition to an exciting name, this new addition to the capital allowance regime represents an enormous potential for tax saving for those who qualify. So how best to capitalise on this unusual generosity from the government?


The super deduction and SR allowance are tax incentives blatantly intended to encourage business investment. One way to view the super deduction is as encouraging companies to accelerate investment by compensating them at 30% for tax relief they might otherwise have obtained at 25% after April 2023 when corporation tax rates are set to increase.


"...the allowances apply only to expenditure incurred in the two year window..."

These new and temporary first year allowances allow companies (not sole traders or partnerships) subject to corporation tax to claim first year capital allowances at 130% and 50% on certain plant and machinery that would otherwise qualify for capital allowances at the main pool rate of 18% or the special pool rate of 6% respectively. There is no upper limit on the amount of expenditure against which the allowances can be claimed and neither the expenditure nor the activity needs to be undertaken in the UK. With a super deduction of 130%, this means that for every qualifying £1 a company spends, it saves 24.7p in corporation tax.


Timing is everything. The allowances apply only to expenditure incurred in the two year window between 1 April 2021 to 31 March 2023. Further, expenditure incurred under a contract entered into before 3 March 2021 will not be eligible for either allowance. Where the exact day on which a contract is made stands between obtaining a super deduction or not, cancelling an existing contract may be tempting but is likely to be treated as ineffective tax avoidance. The super deduction is also proportionately reduced (although never below 100%) where expenditure incurred before 1 April 2023 falls in an accounting period ending after 1 April 2023. The window available in which to claim the super deduction in full may therefore be shorter and more restricted than expected. Given how long investments of a significant scale can take to come into effect, there is little time to spare in taking advantage of these allowances and in reality it may be more a case of ensuring that you can claim the relief on investment already planned.


The super deduction applies to new plant and machinery. Second-hand assets, assets bought for the purposes of leasing with the exception now of certain background plant leased, or assets that qualify for the special rate will not be eligible for a super deduction. Unused and second hand are not defined in the legislation and are likely to be much debated going forward. These are considerable restrictions particular for buyers of used buildings.


Alongside the super deduction is introduced the SR allowance, being a 50% allowance on qualifying special rate assets. Special rate assets, which include integral features and long life assets, do not qualify for the super deduction and correctly managing the grey line between main pool and special pool assets will become even more important for the next two years.


As with other first year allowances, a balancing charge will occur on disposal of the relevant assets. Where the disposal occurs in a chargeable period ending before 1 April 2023 an adjustment is made to ensure the super deduction of 130% is clawed back; for disposal after this period the clawback is the usual 100% of disposal value. In the case of an SR allowance, a balancing charge equal to 50% of the disposal value will arise but without special rules in relation to accounting periods ending before 1 April 2023.


The “easy” option of just claiming SBAs on expenditure relating to commercial buildings is likely to result in significant loss of tax relief. Whilst advantageous for many, these super allowances need to be considered carefully in particular circumstances: will a balancing charge coincide with the increased corporation tax rate? Is it preferable to exhaust the AIA limit first? Could the super deduction enhance losses available to carry back and generate a tax repayment? Is it more attractive to claim the super deduction than to argue for a deduction for repairs? Contrived arrangements to obtain a tax advantage will fall foul of the stringent anti-avoidance rules. Going forward conveyancers acting for buyers of used buildings will need to conduct careful pre contract enquiries into the nature of the allowances claimed.


Given the value of the relief and the short period in which to qualify, the pressure is on advisers to correctly identify and categorise capital expenditure. Are you claiming relief at 150%, 130%, 100%, 50%, 18%, 6%, 3% or 0% this year?

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