Capital allowances: super deductions

The changes made to the capital allowances regime introduce two types of increased relief for expenditure on plant and machinery:

1. Super Deduction: providing relief of 130% in the year of expenditure on most new plant and machinery that would have ordinarily qualified for the main rate writing down allowance of 18% per annum. Examples: furniture, fittings and equipment, welfare facilities, security systems, etc.
2. Special Rate Allowance: providing a first year allowance of 50% on most new plant and machinery that would have ordinarily qualified for the special rate writing down allowance of 6% per annum. Examples: electrical systems (including lighting), cold water systems, air conditioning, space or water heating systems, lifts and external solar shading. 

There is no maximum limit on the amount of Super Deduction or Special Rate Allowances that can be claimed in the two year period to 31 March 2023. These new reliefs are, however, only available to companies within the charge to UK Corporation Tax and not sole traders, partnerships or LLPs.

The expenditure must be incurred on new unused plant and machinery to qualify and only where the contract was entered into after 3 March 2021 even if the expenditure is incurred after 1 April 2021. Expenditure on used or second-hand assets is excluded from the new reliefs along with assets falling within certain exclusions such as cars and plant and machinery used for leasing.

The above exclusion of leased plant and machinery in the original draft legislation created a barrier for landlords being able to benefit from these enhanced allowances on fixtures within a building that is let. There was, however, welcome news for property companies last month with a late amendment made to Finance Bill 2021 at the report stage to extend the Super Deduction and Special Rate Allowance provisions to background plant and machinery in leased buildings.

Background plant and machinery within a building is defined to be plant or machinery of a type that might reasonably be expected to be installed in the building and whose sole or main purpose is to contribute to the function of the building. This will therefore include the type of expenditure landlords typically provide such as electrical systems, lifts, heating and air conditioning systems and sanitary fittings.

There are special rules that apply on the disposal of assets on which the Super Deduction or Special Rate Allowances have been claimed to treat the disposal receipts as balancing charges, instead of being taken to the capital allowance pools. The balancing charge will be taxed at the Corporation Tax rate applicable at the time of the disposal. A company may therefore be taxable on a balancing charge at the main Corporation Tax rate of 25% on a disposal occurring after 1 April 2023 when the original relief was given at the current 19% corporation tax rate. Furthermore, if any asset on which the Super Deduction has been claimed is disposed before 1 April 2023, the disposal value for tax purposes will be 1.3 times the sale proceeds of the asset.

The Super Deduction and Special Rate Allowance will operate alongside the annual investment allowance (AIA), which currently provides 100% relief on £1m of qualifying plant and machinery per annum. The Super Deduction provides more tax savings than claiming the AIA, giving a tax allowance of £1.3m when qualifying expenditure of £1m is incurred. It will however generally be preferable to claim the AIA rather than Special Rate Allowances on the purchase of special rate pool assets where the expenditure is below the AIA threshold.

The Chancellor also extended the carry back of losses to three years at the Budget, which means that where a company cannot fully use the allowances available it may be able to carry back the losses for three years. The introduction of the Super Deduction and Special Rate Allowances have made the tax reliefs for companies investing in capital expenditure in the UK more generous than at any time in history and make it a positive time to be investing in qualifying expenditure from a tax perspective. The capital allowances regime and these new changes are complex so it is important that appropriate professional advice is obtained where you are looking to incur significant capital expenditure.