TAXguide 13/21 Capital allowances: super deduction and 50% special rate allowance

Author: Steve Watts, BDO
Editor: Richard Jones, Technical Manager, ICAEW Tax Faculty

The capital allowances landscape following the provisions in Finance Act 2021 have changed considerably. Steve Watts and Richard Jones considered how the super deduction, special rate allowance and extended annual investment allowance (AIA) will impact spending decisions and capital allowances claims by companies and other businesses over the next two years and beyond.

• View the webinar.

Overview

Find out more about the super deduction and allowance for special-rate pool assets (referred to below as ‘the temporary allowances’) which has been taken from the May 2021 issue of TAXline.

One of the most eye-catching measures supporting business investment in Budget 2021 was a new, unlimited, 130% super deduction for eligible capital allowance expenditure by companies only on plant and machinery incurred between 1 April 2021 and 31 March 2023. This was coupled with an equivalent 50% first year allowance (FYA) for eligible expenditure taken to the special rate pool (such as integral features and long-life assets) over the same period.

At a 19% corporation tax rate, the super deduction provides a 24.7p reduction in tax payable for every £1 spent. The ‘30p top-up’ is pro-rated where the expenditure is incurred in an accounting period (AP) that commences before and ends after 31 March 2023.

Example 1

Babyface Ltd acquires an eligible asset on 20 February 2023 for £1m. Its AP is the 12 months to 31 December 2023. As the super deduction rules apply for 90 days of the AP, the percentage deduction available is: (100% + (90/365 x 30%) = 107%, resulting in a tax deduction of £1.07m in the year ending 31 December 2023.

FYAs for special rate expenditure are given through an upfront relief of 50% of the cost of eligible expenditure. The remaining 50% is taken to the special rate pool, which attracts an annual writing down allowance (WDA) of 6% per annum on a reducing balance basis.

Expenditure eligible for these reliefs is essentially what would otherwise be taken to the main rate or special rate plant and machinery pools, but certain items are excluded, such as:

• second-hand or used assets;
• cars;
• expenditure in the period in which the qualifying business of the company is permanently discontinued; and
• any assets that are acquired for the purposes of leasing to another party (with one exception –see answers to question 9 below).

The usual rules apply for determining the date on which expenditure is incurred. The general rule is that it is treated as incurred as soon as there is an unconditional obligation to pay it. However, expenditure incurred on plant and machinery under a contract entered into before 3 March 2021 is not eligible for the super deduction or special rate allowance even if the expenditure is incurred during the qualifying period. This expenditure would only qualify at the normal rates of plant and machinery allowances.

To complicate things further, the super deduction has a nasty sting in its tail. When an asset on which the deduction has been claimed is disposed of, a balancing charge is brought into account, calculated as set out below.

Adjustment to disposal values when disposing of 'super deduction' assets

Record keeping will be key for calculating the balancing charge on disposal. The 25% corporation tax rate may apply to part of the period in which the balancing charge arises. 

So, the net value of the super deduction may be less than first anticipated.

Example 2

Fox Ltd, a large company, purchased an asset on 1 June 2021 for £1m, which it disposed of on 1 February 2023 for £500,000. It has a 31 December year-end. The respective allowances and balancing charges comparing the super deduction and the AIA are as follows:

Answers to questions raised on the webinar

Computational issues

Q1 Is the super deduction of 130% pro rated in the first year?

There is no pro-rating for expenditure in APs that straddle 1 April 2021. The temporary allowances are both available in full where expenditure is incurred between 1 April 2021 and 31 March 2023 (with special rules for assets acquired through contracts entered into before 3 March 2021 – see Q5 below).

However, if the expenditure is in an AP that straddles 1 April 2023, the rate of the super deduction is apportioned. So, for example, if incurred in an AP ending 31 December 2023, the rate of allowance is 100% + (90/365 x 30%) = 107.4%. The reason for this is that the rate of corporation tax is increasing from 19% to 25% on 1 April 2023. Hence, whenever the expenditure takes place in the AP, the rate of tax relief available is roughly 25p for every £1 of expenditure.

Q2 Can you please confirm that additions attracting the super deduction are not pooled in the main pool?

Yes, that is correct. You can think of assets attracting the super deduction as a little like short life assets in that it is necessary to keep a separate note of their addition rather than adding them to the main pool. When the assets are disposed of it is necessary to bring the disposal proceeds in as a taxable receipt, potentially uplifted by up to 30% depending on when the disposal takes place (see the overview section above).

Q3 Are super deduction assets tracked individually or is there one super deduction pool?

It is necessary to track assets sufficiently to be able to identify when individual assets have been disposed of so that disposal proceeds can be brought into the tax computation in the period of disposal. We are awaiting HMRC guidance on the super deduction but we do not anticipate that it will be necessary to send HMRC a list of assets acquired or disposed of in the corporation tax computation provided sufficient records are maintained internally to support any enquiry and for future disposal purposes.

Q4 If you have special rate pool additions attracting FYAs of 50%, can you use the AIA against the other 50% of the addition? Eg: asset addition = £100,000, so 50% FYA = £50,000 and AIA £50,000?

Yes, but in this instance it would potentially be more beneficial to offset the full amount of the special rate expenditure against the AIA thereby writing off the full amount of the special rate expenditure in the year of expenditure. If the special rate pool expenditure is in excess of the AIA limit then it would be appropriate to offset the full amount of AIA against the special rate expenditure and then claim the 50% FYA on the balance of any relevant qualifying expenditure.

Timing of expenditure

Q5 What qualifies as a ‘contract’? If there is a refurbishment underway which began before 3 March 20201 and equipment, designs etc are being determined and decided upon during the period of the whole build, can I take each purchase of P&M at the date of its invoice? Or will the builders’ invoices be treated as a continuous contract prior to 3 March 2021?

The general rule is that expenditure incurred between 1 April 2021 and 31 March 2023 qualifies for the temporary allowances. However, expenditure incurred pursuant to a contract entered into before 3 March 2021 is not eligible for either allowance.

Assuming that expenditure qualifying for these assets follows the same rules as for general plant and machinery, CA11700 says that expenditure is incurred under a contract if it is legally binding and the taxpayer is contractually committed to the expenditure.

We would consider it reasonable that each individual item of expenditure can be treated as incurred separately if in pursuant of separate contracts. However, if the taxpayer entered into a contract prior to 3 March 2021 with a builder and under that contract was contractually obliged to incur the expenditure which later becomes the subject of individual invoices then we consider that none of that expenditure would be eligible for the temporary allowances as it was all subject to a contract dated before 3 March 2021.

Q6 Is the date expenditure incurred the date of invoice or the date cash leaves our bank account?

Under s5, CAA 2001, the normal rule is that expenditure is incurred on the date on which the obligation to pay becomes unconditional. Hence, if expenditure is subject to a conditional contract, no expenditure is deemed to have been incurred until those conditions are met. If goods are sold subject to reservation of title (a Romalpa contract, see CA11700) the obligation to pay becomes unconditional when the goods are delivered. Further guidance is available at CA11800. This relates to capital allowances expenditure in general, but we expect that it would also apply to expenditure eligible for the temporary allowances.

Excluded assets

There are a number of types of assets that are excluded from both temporary allowances. These include used and second-hand assets, long-life assets, cars, and assets acquired for leasing (with some exceptions – see below).

Questions and further details on some of these exclusions are set out below.

Q7 Are fully electric cars with 0% CO2 emissions eligible for these allowances?

No, but they may still qualify for 100% FYAs under s45D, CAA 2001 – Expenditure on cars with low carbon dioxide emissions subject to meeting the qualifying conditions.

Q8 Are there any circumstances in which cars would attract either temporary allowance? Does the car exclusion apply to all types of business activity or are there exceptions?

Some types of cars are considered by HMRC not to fall within the statutory definition and therefore eligible for the temporary allowances and AIA, as set out in CA23510:

• A car that it is illegal for a taxpayer to use as a private vehicle even if the taxpayer sometimes uses it as a private vehicle (Gurney v Richards 62TC87).
• Cars used by a driving school and fitted with dual control mechanisms (Bourne v Auto School of Motoring (Norwich) Ltd 42TC217)
• Emergency vehicles. A vehicle equipped with a fixed blue flashing light on the roof which can only be used on the road by a fire officer or police officer is an emergency vehicle.
• Hackney carriages (traditional ‘London black cab’ type vehicles).
• Double cab pick-ups with a payload of one tonne or more. (Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight).

Q9 Is a new lease shop fit-out expenditure eligible for the temporary allowances?

Yes, if the tenant is incurring expenditure on plant and machinery and meets the qualifying conditions for claiming plant and machinery allowances including expenditure on fixtures and the conditions for the temporary FYAs.

In general, if a landlord fits out a shop unit and leases that unit to another business, the expenditure incurred by the landlord on the assets included in the fit-out may be eligible for the temporary allowances, subject to the exclusions set out below.

Although assets acquired for the purposes of leasing are generally excluded from both allowances, plant and machinery that is provided for leasing under an excluded lease of background plant or machinery for a building is not excluded. Background plant and machinery is defined at s70R, CAA 2001 as follows:

• plant and machinery fixed to or installed in or on a building;
• that is of the type that might reasonably be expected to be installed in the building in question
• whose sole or main purpose is to contribute to the functionality of the building within which activities can be carried on; and
• that is leased along with the building itself.

There are exclusions where:

• the amounts payable under the lease vary depending on the amount of expenditure incurred by the landlord on the plant and machinery; or
• the main or one of the main purposes of the lease or associated arrangements is to secure that allowances are available to the landlord on the expenditure of the plant and 
  machinery.

Q10 Are companies which lease assets to trading companies in the same group excluded from claiming?

There is no specific exception to the exclusion of leased assets where the lease takes place intra-group so unfortunately the lessor would not be entitled to the temporary allowances. Groups with an in-house leasing company may therefore wish to reconsider their internal structure or have operating companies acquire relevant assets directly.

Q11 What about where an asset (such as a piece of machinery) is leased along with an operator?

It is important to make a distinction between assets used for leasing and those used in the course of providing a service because the latter are not excluded from the temporary allowances. In the construction industry, HMRC’s guidance at CA23115 states that plant provided predominately with an operative is more than mere hire. HMRC also accepts that the provision of building access services by the scaffolding industry amounts to a construction operation and not just mere hire. Each case, however, needs to be decided on its own facts.

Q12 Would salaries capitalised to bring the asset into existence be eligible for the super deduction?

In the absence of specific guidance on the temporary allowances, HMRC’s guidance at CA20060 makes the point that the phrase “expenditure on the provision of plant and machinery” should be interpreted narrowly. Remote or indirect expenditure would not satisfy this condition. It therefore follows that the capitalised salary cost would need to be very closely related to the provision of the plant and machinery to qualify.

Q13 Would the partners of a partnership that has only corporate members qualify for the temporary allowances?

Section 9(2) & (3), Finance Act 2021 require the expenditure to be incurred by a company within the charge to corporation tax. In the absence of guidance from HMRC, it would seem that corporate members would not be entitled to these allowances as the entity incurring the expenditure is not a company.

Q14 What happens on succession of a trade to a group company?

Chapter 1, Part 22, CTA 2010 sets out what happens to losses and capital allowances when a trade is transferred between group companies such that there is no “change in ownership” of the trade.

Section 948 provides that no allowances or charges arise on the transferor and the transferee is treated as acquiring the assets at tax written down value. In the absence of specific guidance from HMRC, we believe that the same would happen in respect of assets which qualified for the temporary allowances. Hence, there would be no balancing charge on the transferor and the transferee would be charged on its disposal proceeds (uplifted as appropriate) if it subsequently sells the assets.