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Super Deduction tax relief for spend on Qualifying Capital Assets

One of the main announcements to come out of the 2021 Budget was, as Rishi Sunak called it, “…the biggest business tax cut in modern British history”, with the introduction of the Super Deduction for spend on Qualifying Capital Assets, hereby referred to as ‘The Super Deduction’.

This article will provide details on what the Super Deduction is, what benefit it will bring and some of the early pitfalls to be aware of when utilising this relief.

What is the Super Deduction?

The Super Deduction is a new Capital Allowance and is available for the purchase of ‘new and unused’ Plant and Machinery from 1 April 2021 to 31 March 2023. Purchases of this kind will attract a 130% deduction on the spend that the company incurs where the item qualifies as a Main Pool item for Capital Allowances, the deduction drops to 50% where the items qualify for Special Rate Pool treatment.

What is the tax benefit of the Super Deduction?

In monetary terms, the investment will provide a tax benefit of up to 24.7p for every £1 of investment made in qualifying assets. The benefit drops to 9.5p for every £1 if the item qualifies for Special Rate Pool treatment.

It is hoped that this tax relief will unlock investment by companies who have performed well during the pandemic and built-up significant cash reserves as well as providing an enhanced benefit to companies looking to rebuild as a result of the pandemic.

Do Sole Traders or Partnerships qualify for the Super Deduction?

The Super Deduction is only available to companies that invest in qualifying assets. Therefore, businesses that operate as a Sole Trader or Partnership will not qualify for the Super Deduction. However, they will continue to be able to claim Annual Investment Allowance at up to £1m per annum, with this due to fall to £200k from 1 January 2022.

What assets are classed as ‘new and unused’ Plant and Machinery?

On review of the legislation relief is specifically only available for assets that are ‘new and unused’ Plant and Machinery on purchase by the company. The purchase of used and second hand Plant and Machinery or other investments such as cars, shares or residential property will not qualify for the Super Deduction. There is not a hard definition that has been released by HMRC for the Super Deduction, but we do have a definition of ‘new and unused’ when considering the purchase of a car.

Here, HMRC state that “a car is unused and not second hand even if it has been driven a limited number of miles for the purposes of testing, delivery, test driven by a potential purchaser, or used as a demonstration car.”

Therefore, a machine that has been an ex-demonstrator or has been used for testing by the company prior to purchase would, under this definition, be classed as ‘new and unused’.

What if I want to purchase the assets via a Hire Purchase Agreement?

Purchasing the asset via a Hire Purchase Agreement could result in the asset not qualifying for the Super Deduction. There are specific rules to state that the ownership of the assets must transfer to the lessee for the asset to qualify for the Super Deduction. Therefore, care will need to be taken on a case by case basis and a careful review of the agreement documents will be required.

Will a purchase qualify for the Super Deduction if I entered a contract before 3 March 2021 but will not make any payments until after the relief is introduced?

Another specific detail within the legislation is that any contracts for the purchase of assets that have been entered into before the Budget announcement will not qualify for the Super Deduction regardless of when the payments are made. This is a specific piece of anti-avoidance legislation that has been introduced and therefore provides HMRC with the power to penalise a company if it is found that they have claimed the relief when the contract was entered into before 3 March 2021.

What if I want to make the investment in a year end that ends after 1 April 2023?

If the year end that the investment is made straddles 1 April 2023 then the full 130% deduction will not be available to the company. For example, if the company has a 31 December year end then the percentage that would be used in the 2023 year end would be 107.4% whereas if the purchase was made in December 2022 the percentage would be 130%. This is an important point to note as it could result in significantly less tax relief being due than could have been obtained if the purchase is delayed.

For further information on the Super Deduction, please contact our tax manager Phil Hartley:

Super Deduction Tax Relief

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