Budget 2021 included a temporary increase to capital allowances for companies:
• 130% ‘super-deduction’ in terms of the acquisition of most brand new (unused) plant and machinery that is eligible for the usual main rate pool allowance of 18%.
• 50% ‘first-year allowance’ for other expenditure (on brand-new items) that would otherwise be eligible for the 6% ‘special rate pool’.
• There is no limit on the expenditure, unlike with the 100% annual investment allowance (AIA).
• It applies for eligible expenditure incurred on or after 1 April 2021 but before 1 April 2023.
So, if your Business/Company buys a brand-new van for £30,000 in July of its year ended 31 December 2021, and it is otherwise eligible for the super-deduction, the allowance for tax purposes will be:
£30,000 x 130% = £39,000
The effective rate of corporation tax relief on qualifying super-deduction expenditure will be:
19% x 1.3 = 24.7%. Broadly, 25%.
*Note special rules for the super-deduction where the acquisition is in a chargeable period ending on or after 1 April 2023: the 130% rate is reduced towards 100% by reference to the extent of the chargeable period that goes beyond 31 March 2023.
Beware the clawback provisions
There are, of course, super-clawback provisions, which apply to subsequent disposals of assets that enjoyed either the 130% super-deduction or the 50% first-year allowance for special-rate assets. A separate balancing charge is deemed to arise on disposal, rather than (typically) proceeds being taken against the standard pools.
In terms of super-deduction assets, while the initial relief enhancement rate of 130% is reduced towards 100% to the extent that the chargeable period of acquisition extends past 31 March 2023, a corresponding uplift factor to the balancing charge is increased from 100% to as much as 130%, to the extent that the period of disposal starts before 1 April 2023.
In situations where the company has the choice, the order of priority will generally be:
1. Super-deduction at 130%.
2. AIA at 100% (prioritised in favour of expenditure that would otherwise qualify for the enhanced special rate of 50%).
3. Enhanced special rate of 50%, effectively where the AIA has run out.
Those companies that hope to benefit from the super-deduction may want to consider shortening their accounting periods to 31 March 2023 to avoid restricting the 130% enhancement for qualifying expenditure towards the end of the period of availability.