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Super-deduction: an attractive measure but start planning now

Author: ICAEW Insights

Published: 11 Mar 2021

The government’s new capital allowance ‘super-deduction’ hopes to boost business investment and productivity, but good planning and record-keeping are essential for businesses hoping to take advantage.

Experts have been poring over the detail of the ‘super-deduction’, a £25bn tax break announced in last week’s Budget intended to spur business investment, aid post-pandemic economic recovery and give a boost to the UK’s productivity levels.

For two years from April 2021, companies’ investments in plant and machinery will qualify for a 130% capital allowance deduction, providing 25p off company tax bills for every £1 of qualifying spending on plant and machinery. The policy aims to spur post-pandemic growth and give the government more corporate profits to tax come 2023.

The government says since the COVID-19 pandemic, previously low levels of business investment have fallen further, with a reduction of 11.6% between Q3 2019 and Q3 2020. “Making capital allowances more generous works to stimulate business investment,” HM Treasury explains. “As a result, these measures can promote economic growth and counter business cycles. The super-deduction will give companies a strong incentive to make additional investments, and to bring planned investments forward.”

Good record-keeping is essential

Richard Jones, ICAEW’s Business Tax Manager, said it was the first time the government had introduced a rate of capital allowances relief that exceeded 100%. The absence of an upper monetary limit and few exclusions in terms of the kinds of plant and machinery for which it could be used make it an attractive measure, Jones said.

“However, if you dispose of that asset before the end of the regime, it could end up costing you more in tax than you got a deduction for. That uplift is something to look out for,” Jones warned. He urged companies to keep track of the assets they buy on an individual basis and ensure if they sell them, they put the right figure in their tax computations. “Good record-keeping is essential,” he added. 

Jones said those companies using finance to invest in plant and machinery through hire-purchase type arrangements would also be able to access the Chancellor’s super-deduction, provided payments are being made to acquire the asset and there is an expectation that legal ownership in the asset will pass at some point to the lessee on it exercising an option or another event occurring. 

Meanwhile, questions remain over whether the super-deduction applies to software developed in-house that has been capitalised as an intangible fixed asset in the company’s accounts. “Normally, it is treated as an intangible asset for tax purposes, but you have the option of putting it through the capital allowances regime. The question is, would that expenditure qualify for the super-deduction? There’s nothing specific in the legislation about that so we can’t give a definitive answer. My expectation is that it should do, but it would be nice to get some clarity from HMRC.” 

Queries have also been raised over the potential for the incentive to be abused for tax avoidance purposes, but Jones commented that the super-deduction regime was no more open to abuse than any other expenditure companies were claiming. “This would be covered by a broad anti-avoidance rule that means that any allowances claimed artificially will be disallowed. To that extent, HMRC has some protection there.”

Given the limited lifespan of the tax break and the timings involved in decisions on expenditure on plant and machinery, companies should start planning now, Jones urged. “If you’re thinking of making any investments in plant and machinery, think about bringing it forward to take advantage of this regime.”

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