Nothing is ever straightforward in the world of tax, and the new 130% super deduction for plant and machinery is no exception.

Here’s what companies need to know to take advantage of this new form of capital allowance.

What is a super deduction?

The much-vaunted super deduction allows companies to claim a 130% first year allowance (FYA) for investment incurred on ‘main pool’ items of plant and machinery acquired in the period between 1 April 2021 and 31 March 2023.

This includes the more obvious items of plant and machinery like manufacturing equipment, machines and computers, but it also extends to items of main pool plant and machinery that are fixtures in properties and may also be available for a proportion of construction expenditure incurred on new or refurbished buildings. This point is often overlooked but it could be a stimulus to commence building works in the period.

New 50% FYA

Sitting alongside the super deduction is a 50% FYA for expenditure incurred on special rate pool items of plant or machinery, which includes integral features, solar panels and thermal insulation.

Other conditions

• The 130% super deduction and 50% FYA are only available for plant and machinery that is new and unused.
• Neither new allowance applies to assets purchased second-hand.
• Relief is time apportioned for accounting periods that straddle 1 April 2021 and 31 March 2023.

Both of these measures, taken together with the £1m Annual Investment Allowance cap, would appear to be a generous suite of tax incentives to encourage investment. However, on closer inspection, there are some caveats and omissions that might make the super deduction less attractive than first thought.

Exclusions – who or what misses out?

Both the super deduction and the 50% FYA for special rate pool plant and machinery are only available to companies, so sole traders, partnerships and LLPs do not qualify. These reliefs are also only available for contracts entered into after 3 March 2021 so projects that have already been committed to before or during the course of the pandemic, and that may have been mothballed for obvious reasons, will not qualify.

Not for landlords

The measures are not available to landlords investing in the construction of new property or the refurbishment of existing premises. It would seem to be contradictory to the intention of the measures to omit such a large sector that could, in turn, have a stimulating impact on many related sectors of the economy in the supply chain supporting the construction industry. This may have been an unintended consequence in the drafting of the legislation. So we may well see clarification from HMRC on this point.

Not for cars

Long-life assets and cars are also excluded, but vehicles not deemed to be cars (vans, motorbikes etc used for trading purposes) are within the scope of the measure.

Future impact of the measure

The measures only apply to expenditure incurred from 1 April 2021 until 31 March 2023 so companies will only receive the FYAs during the time when the 19% corporation tax rate applies. Clearly, the next two years may not be that profitable for a lot of companies as they emerge from the pandemic period, so having additional capital allowances to offset against corporation tax may not be as beneficial as it might first appear.

Even if the level of profits might not warrant the need for increased levels of capital allowances over the next two years, when the corporation tax rate increases to 25% from 1 April 2023 (or the expected marginal rate of 26.5% for companies with profits between £50,000 and £250,000), claiming the first year increased capital allowances may lead to a tax loss. This can be carried forward into the more punitive tax rate periods, thereby mitigating future tax liabilities.

Disposal issues

A major problem with the application of the super deduction and special rate FYAs relates to disposal values when assets are sold or disposed of.

Items of plant and machinery are ordinarily added to a pool and writing-down allowances of either 18% for main pool items, or 6% for special rate pool items are claimed from the pool and assets that are disposed of only really reduce the total relevant pool amount. However, because the super deduction and 50% special rate measures are FYAs, they are not pooled. 

When an asset is sold in the period up to 31 March 2023, that could result in an immediate balancing charge, with 130% of the cost being clawed back and declared as taxable income. Again, this may be an unintended consequence of the draft legislation.

Conclusion

As always, there are a number of points that need to be considered if companies are to take maximum strategic advantage of the relief and, as with all areas of taxation, appropriate professional advice should be sought.

Noel Guilford