As the 25% Corporation Tax rate approaches, the end of the super-deduction draws near
Chris Campbell considers the key technical considerations arising ahead of the demise of the Capital Allowances super-deduction
How has the super-deduction affected the Capital Allowances that can be claimed by a business?
Introduced as part of the Finance Act 2021, the Capital Allowances super-deduction has enabled companies purchasing qualifying new plant and machinery to claim a 130% deduction on assets that would normally qualify as additions in the Capital Allowances main pool. A separate 50% first year allowance has also been available on assets that would normally qualify as additions in the Capital Allowances special rate pool.
No super-deduction can be claimed by unincorporated businesses, although they remain able to claim Annual Investment Allowance (AIA) on qualifying expenditure up to the £1 million annual limit (now permanent in one of the few measures of the Mini Budget not to be reversed). In the case of partnerships, AIA can of course only be claimed where all members of the partnership are individuals.
The super-deduction does not affect the ability of companies to claim AIA (subject to the normal criteria) where no super-deduction is available. A common example would be in respect of second hand assets, which ICAS Members tell us is a common occurrence where there have been supply issues in ordering new assets.
By setting the super-deduction at 130%, the government has been providing companies broadly the same tax relief as they would expect to receive on AIA qualifying additions after the main Corporation Tax rate increases to 25% in April 2023. As noted in the ICAS response to the Mini Budget, HMRC has confirmed that the £1 million AIA limit covers all qualifying expenditure for most UK businesses, so it was considered necessary to enable companies to claim the super-deduction to prevent them from delaying expenditure to post April 2023 to receive a higher rate of Corporation Tax relief.
What expenditure would be covered by the super-deduction?
The super-deduction is available for new and unused qualifying main pool expenditure between 1 April 2021 and 31 March 2023, although it cannot be claimed where contracts were entered into before 3 March 2021 (which was Budget Day). The normal Capital Allowances exclusions in Section 46 CAA 2001 apply in this case, the most common examples being cars and expenditure in the period when a business permanently ceases.
ICAS Members have told us that the exclusion of assets purchased under pre-Budget Day 2021 contracts has had an impact on the availability of super-deduction on assets with a long lead time for delivery, such as specialist machines or lorries/vans (no super-deduction being available on cars) where there may have been delays due to the availability of components or other factors impacting delivery post the COVID19 pandemic.
So there will be cases where no super-deduction has been available even where the asset was delivered some months after the super-deduction was introduced. When it comes to the super-deduction, the importance of the timing of expenditure cannot be understated and this is equally important when it comes to the run up to the demise of the super-deduction at the end of March 2023.
How will the super-deduction apply in the run up to March 2023?
For companies with a 31 March year end, the position is relatively simple. Super-deduction can be claimed on qualifying expenditure in the year ended 31 March 2023 at 130% as per above. Thereafter, AIA would be available on qualifying expenditure up to the annual limit (currently £1 million) securing Corporation Tax relief at a rate of 25% in the year ended 31 March 2024 onwards unless the company is paying tax at 19% (taxable profits below £50,000, as adjusted for associated companies) or the effective marginal rate of 26.5% for taxable profits between £50,000 and £250,000).
Companies with a year end other than 31 March will need to apply the transitional rules in Section 11 of the Finance Act 2021. This will apportion the super-deduction to pro-rate the 30% uplift so that the company receives a proportion of the 30% based on the number of days in a company’s accounting period that are before 1 April 2023. This reflects the fact that the company’s taxable profits in the accounting period straddling 31 March 2023 will be pro-rated between the old and new Corporation Tax rates.
For the example of a company with a 30 June 2023 accounting year end, there are 274 days before 1 April 2023, so the super deduction rate is 122.52%, being 274/365 x 30% plus 100%.
To help illustrate the super-deduction transitional rules, HMRC has included a calculator on its website. This asks several questions with a view to finding out whether the expenditure is firstly eligible for the super-deduction, before calculating the expected super-deduction available for a particular company taking into account the transitional rules above.
What timing rules do tax practitioners need to be mindful of?
The rules in Section 5 CAA 2001 on the timing of expenditure are particularly relevant, as this will affect whether expenditure can be treated as having been incurred before 1 April 2023. Where the company does not have a 31 March 2023 year end, this will also impact on whether the expenditure falls within the period in which the transitional rules in Section 11 Finance Act 2021 apply.
The normal rule in Section 5 CAA 2001 is that expenditure is treated as incurred when there is an unconditional obligation to pay it, even when all or part of the expenditure does not require to be paid until a later date. HMRC often considers delivery date to give rise to an unconditional obligation, however this is not specified in the legislation.
There is an exception where payment is not required to be paid until more than four months after the unconditional obligation exists, in which case the expenditure is treated as incurred on the payment date. Section 5 CAA 2001 also has anti avoidance provisions to prevent the creation of an unconditional obligation for an earlier date than would reflect normal commercial usage and there are rules in Section 14 Finance Act 2021 to prevent a tax advantage (whether the receiving of super-deduction or avoiding a balancing charge on sale) arising where there are arrangements in place that are contrived, abnormal or lacking a genuine commercial purpose.
Further rules apply in respect of assets bought under hire purchase, given the requirement of Section 67 CAA 2001 for the asset to be brought into use before Capital Allowances can be claimed.
What happens when an asset on which super-deduction has been claimed is sold?
Most of the focus of the last two years has been on the availability of the super-deduction on qualifying expenditure by companies, but it is important to bear in mind the rules in Section 12 of the Finance Act 2021 when it comes to the disposal of those assets.
In a departure from the normal position for assets on which AIA has been claimed (in that any balancing charge would arise on a disposal where the proceeds are more than the remaining allowances in a Capital Allowances pool), a balancing charge would arise on the full proceeds of the sale of an asset on which the super-deduction has been claimed and the legislation makes no reference to any end date for this treatment.
Furthermore, if the disposal takes place before 1 April 2023, the proceeds for the balancing charge are uplifted by what is known as the ‘relevant factor’. For disposals in an accounting period ending before 1 April 2023, ‘relevant factor’ is 1.3.
For disposals in an accounting period that straddles 1 April 2023, the ‘relevant factor’ is calculated as follows:
- Divide the number of days in the accounting period before 1 April 2023 by the total number of days in the company’s accounting period.
- Multiply the result by 0.3.
- Add 1 to the result.
Whilst the adjustment for the ‘relevant factor’ will have an impact on Capital Allowances computations in the short term, it will be important for tax practitioners to retain a note of the assets on which super-deduction has been claimed so that these can be referred to in future Capital Allowances computations. This will be particularly relevant where super-deduction is not available on all of a particular item expenditure, Section 14(4) of the Finance Act 2021 covers this point in respect of identifying the ‘relevant proportion’ of expenditure in terms of the calculation of the balancing charge when the asset is sold.
The world may be trying to move forward from the COVID19 pandemic, but it is clear that the Capital Allowances super-deduction will still have an impact for some time to come on Corporation Tax computations.
Let us know your views
The demise of the super-deduction will present tax practitioners with several technical challenges over the coming months and we encourage Members to let us know where these cause issues. We welcome Members’ input to inform our work on consultations or other tax-related matters – email email@example.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members.