A headline-grabbing Budget announcement was the creation of a new two-year capital allowances 130% ‘super-deduction’ (a 30% uplift for main pool plant and machinery) and 50% first-year allowance (FYA) acceleration of relief for special rate pool assets.
However, the chancellor and his officials demonstrated a lack of understanding about how capital allowances work when his speech wrongly described the super-deduction as reducing the ‘tax bill’ by 130% of the cost. Fortunately, this has since been corrected to read ‘taxable profits’ on the government’s website.
These measures generated striking newspaper headlines, but the detail showed that the rules are complex and the small print was less impressive.
Firstly, the changes are only available to companies subject to corporation tax. Not sole traders, partnerships or limited liability partnerships. That perhaps appears harsh for unincorporated businesses, but it is worth remembering that they will still benefit from the £1m 100% annual investment allowance which remains until at least 31 December 2021. Also, only companies will suffer the six-percentage point tax rate hike to 25% from financial year 2023/24. So, presumably the chancellor’s thinking was to balance a 25% investment sweetener now (i.e. 130% relief x 19% tax rate), with the pain of a 25% tax rate when these incentives expire.
These reliefs are also just for new, unused plant and machinery, not second-hand assets. So, they will not be available for property purchases, except new assets bought unused from a trading property developer. Furthermore, hire purchase spending is subject to restrictions.
In addition, the measures have a strict end date for expenditure incurred up to 31 March 2023. But in practice they have a floating start date because expenditure must be after 1 April 2021 and the contract must be entered into from 3 March 2023. This means that lots of expenditure over the next couple of years will not be eligible because it was already committed to before Budget day. And given the usual delay between signing a contract and incurring expenditure, there may be limited qualifying expenditure in the early months of these measures.
Finally, because both the 130% and 50% relief are FYAs, they are subject to the general exclusions of CAA 2001 s46. This results in some surprising and disappointing gaps in the benefit. Landlords miss out because FYAs are not available for assets provided for leasing. This seems unfair given that expenditure by property investors will boost the economy in a similar way to owner-occupiers and tenants. It can also help the environment through net zero carbon initiatives. Long-life assets and cars are also ineligible (whereas non-car vehicles benefit). Because FYAs are not pooled for capital allowances purposes it also means that disposals result in a ‘balancing charge’ (i.e. declaration as immediately taxable income), rather than reducing the balance of the pool. Here, the intention of the draft legislation is that for disposals before 1 April 2023 the full 130% is clawed-back but for later disposals in a period straddling that date it tapers down to 100% by 31 March 2024.
Home >Articles > Spring Budget 2021: capital allowances and the super-deduction
Spring Budget 2021: capital allowances and the super-deduction
A headline-grabbing Budget announcement was the creation of a new two-year capital allowances 130% ‘super-deduction’ (a 30% uplift for main pool plant and machinery) and 50% first-year allowance (FYA) acceleration of relief for special rate pool assets.
However, the chancellor and his officials demonstrated a lack of understanding about how capital allowances work when his speech wrongly described the super-deduction as reducing the ‘tax bill’ by 130% of the cost. Fortunately, this has since been corrected to read ‘taxable profits’ on the government’s website.
These measures generated striking newspaper headlines, but the detail showed that the rules are complex and the small print was less impressive.
Firstly, the changes are only available to companies subject to corporation tax. Not sole traders, partnerships or limited liability partnerships. That perhaps appears harsh for unincorporated businesses, but it is worth remembering that they will still benefit from the £1m 100% annual investment allowance which remains until at least 31 December 2021. Also, only companies will suffer the six-percentage point tax rate hike to 25% from financial year 2023/24. So, presumably the chancellor’s thinking was to balance a 25% investment sweetener now (i.e. 130% relief x 19% tax rate), with the pain of a 25% tax rate when these incentives expire.
These reliefs are also just for new, unused plant and machinery, not second-hand assets. So, they will not be available for property purchases, except new assets bought unused from a trading property developer. Furthermore, hire purchase spending is subject to restrictions.
In addition, the measures have a strict end date for expenditure incurred up to 31 March 2023. But in practice they have a floating start date because expenditure must be after 1 April 2021 and the contract must be entered into from 3 March 2023. This means that lots of expenditure over the next couple of years will not be eligible because it was already committed to before Budget day. And given the usual delay between signing a contract and incurring expenditure, there may be limited qualifying expenditure in the early months of these measures.
Finally, because both the 130% and 50% relief are FYAs, they are subject to the general exclusions of CAA 2001 s46. This results in some surprising and disappointing gaps in the benefit. Landlords miss out because FYAs are not available for assets provided for leasing. This seems unfair given that expenditure by property investors will boost the economy in a similar way to owner-occupiers and tenants. It can also help the environment through net zero carbon initiatives. Long-life assets and cars are also ineligible (whereas non-car vehicles benefit). Because FYAs are not pooled for capital allowances purposes it also means that disposals result in a ‘balancing charge’ (i.e. declaration as immediately taxable income), rather than reducing the balance of the pool. Here, the intention of the draft legislation is that for disposals before 1 April 2023 the full 130% is clawed-back but for later disposals in a period straddling that date it tapers down to 100% by 31 March 2024.
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