Practical guide: how does the Autumn Budget affect the super-deduction?

Recap: super-deduction

The super-deduction was announced back in March 2021, and so is approaching the half-way mark of its scheduled lifespan. It gives an enhanced 130% allowance for companies in respect of qualifying expenditure on plant and machinery which would normally qualify for an 18% writing down allowance. There is also a 50% first-year allowance for expenditure which would normally attract a 6% special rate pool writing down allowance.

Planning for 2022

With the scheme heading toward its final year, it is a good time for companies to review short-term capital expenditure intentions, along with recent circumstances in the wake of the pandemic. A particularly valuable boost may accrue where companies can combine use of the super-deduction with the coronavirus-related extended loss carry back provisions.

Timing of expenditure is also important to get optimal results with the super-deduction, where accounting periods span 31 March 2023. On the downside, the super-deduction doesn’t always mean 130% relief, and disposals can produce significant balancing charges.

Budget complications

Choosing the right allowance to relieve expenditure in the most efficient way is complex. This has been muddied further with the announcement at the 2021 Autumn Budget that the annual investment allowance (AIA) will remain at £1 million until 31 March 2023. Companies should urgently review the position if they have received advice in the expectation that the AIA would fall back to earlier levels on 1 January 2022, checking that advice is still current.

The corporation tax changes coming in 2023 create further complications. companies should check for any potential impact on asset disposals where enhanced capital allowances were claimed and the  year end will span 31 March 2023.

The Budget announcement extends the time period that businesses will need to consider whether they will be better off claiming the AIA or the super-deduction. Much of this will be informed by the intentions for the asset purchased, e.g. if it is likely to be sold relatively quickly, as balancing charges can be triggered if so. 

A company should review the assets it is looking at buying carefully. If some of the expenditure would only qualify for the 50% first-year allowance (FYA), it will be better to offset this using the AIA, as relief will be at 100%. Additionally, second-hand assets don’t qualify for the super-deduction or 50% FYA, so again these should be matched against the AIA.

Enhancing losses

Companies should check to can use the super-deduction to enhance losses that could fall within the extended loss carry back provisions. The timeframe is short, as the loss provisions expire on 31 March 2022, so this option is only available 1 April 2021 to 31 March 2022.

It could be worth companies accelerating expenditure to ensure it falls within this window. It could be the difference between a year with poor profits and a year with a loss relievable under favourable rules, and possibly a corporation tax (CT) refund.

Avoiding problems

If companies are going to be utilising the super-deduction, there are further points  to ensure the maximum possible relief is secured.

Of particular importance is the impact of the accounting date on acquisitions and disposals. The super-deduction is available for the two financial years ending 31 March 2023, but the rate is impacted by the company accounting date. The rate is reduced where an accounting period straddles 31 March 2023. This means the super-deduction can fall well below 130%, even for expenditure incurred before the 31 March 2023 deadline if the accounting period ends after 31 March 2023.

The interaction between straddling rules and future CT rates is key. Companies expecting to fall within the new marginal rate or to pay at small profits rate may lose out if asset purchases fall in a straddling year.

The straddling rules are contained in s.11 Finance Act 2021, and state that the percentage for the super-deduction is 100%, plus an amount of up to 30% depending on the number of days in the accounting period before 1 April 2023.

This additional percentage is worked out by dividing the number of days in the accounting period before 1 April 2023 by the total number of days in the accounting period and multiplying the result by 30%.

Example. ABC Ltd incurs capital expenditure in its accounting period to 30 June 2023. There are 274 days in the accounting period before 1 April 2023: the super-deduction rate is therefore 274/365 x 30% = 22.5% plus 100%. Here the super-deduction equates to 122.5% rather than 130%.

This has planning implications now. In the above example, with a 30 June accounting date, expenditure incurred on 30 June 2022 would attract 130% relief, but expenditure on 1 July 2022, falling in the year to 30 June 2023, would only get 122.5%. If the company’s post-31 March 2023 tax rate is under 25%, it could lose out. Remember, the super-deduction has no upper limit, so the potential loss of relief could be significant.

Disposals

Careful thought is needed for disposal of assets for which the super-deduction has been claimed. This may need to be factored in from the outset, and the position explored. The critical point is that sale of super-deduction assets leads to an immediate tax charge. The legislation contains new disposal rules.

For disposals on which the super-deduction has been claimed in accounting periods ending before 1 April 2023, the proceeds are multiplied by 1.3. This is to counter possible exploitation of the system by businesses claiming 130% relief on expenditure, but only accounting for 100% of sale proceeds on disposal. The scaled-up proceeds figure is immediately charged to tax as a balancing charge. It is not set off against any pool balance.

For disposals in accounting periods ending after 1 April 2023 the multiplying factor is adjusted. It is calculated by dividing the number of days in the accounting period before 1 April 2023, by the total number of days in the accounting period, multiplying the result by 0.3 and adding 1.

Companies should give close consideration to the timing of disposals, as this will significantly affect the amount and timing of the balancing charge. The impact will depend on anticipated future CT rates, with those in small profits/marginal relief particularly affected by early disposals.

Where the super-deduction was only claimed on a part of an asset, then only that proportion of the sale proceeds is multiplied by the fraction. The remaining part of the proceeds can be set off against pool expenditure.

Where the special rate FYA of 50% is claimed and an asset is disposed of, the balancing charge is calculated differently, but there is still an immediate charge to tax. The balancing charge is calculated as sales proceeds x (0.5 x expenditure on which special rate FYA claimed/total expenditure). The balance of sale proceeds is set against the special rate pool.