Budget 2021 – Super-Deduction… Super Confusing!
As part of his Budget on 3 March, Rishi Sunak announced a temporary super-deduction for limited companies only which will allow them to claim 130% first year allowance (FYA) on a plant and machinery purchase and 50% FYA on a special rate purchase between 1 April 2021 and 31 March 2023.
This relief sits alongside the current Annual Investment Allowance (AIA), which provides 100% relief on plant and machinery and special rate purchases up to 31 December 2021. We do not know what will replace this scheme after that date.
On the face of it, the relief is fantastic, undoubtedly encouraging companies to invest in qualifying equipment, however there a number of factors to consider when planning for the capital expenditure and considering whether to elect to claim the relief or not.
Only new equipment will qualify for the relief, second hand and potentially pre-registered vehicles will not qualify.
The rules on disposing of assets covered by a super-deduction claim also need to be considered. Where the 130% was claimed, the value of the disposal needs to be grossed up by a factor of 1.3 potentially creating a balancing change (the proceeds cannot be offset against any general pool balance). If these disposals are made after 1 April 2023, this would increase your taxable profit in a period where the corporation tax rate increases to 25%. This could lead to larger than expected future tax bills, especially when we are uncertain what will happen to the AIA allowance after 31 December 2021.
Interestingly there are no such rules for the disposal of assets that claimed the 50% special rate deduction.
Claiming the super-deduction may still be the best thing to do, especially where the assets will be held for a long time and have a low resale value, however careful planning will be required along with your tax advisors to ensure the best outcome.