Further details of the new super deduction were revealed in the 11 March draft of the Finance Bill 2021. The new 130% deduction is available for expenditure on new plant and machinery which would otherwise qualify for the 18% main rate of capital allowances. A special rate first year allowance at 50% (the SR allowance) is available for expenditure that would otherwise have qualified for the special rate writing down allowance, such as integral features or long life assets.
The expenditure must be incurred between 1 April 2021 and 31 March 2023 in order to qualify for the super deduction. Expenditure incurred under contracts entered into before 3 March 2021 does not qualify for the super deduction, even if an unconditional obligation to make a payment under the contract does not arise until 1 April or a later date. There is also a targeted anti-avoidance rule which enables the counteraction of contrived or abnormal arrangements (or those which circumvent the intended limits of the relief) which have a or the main purpose of obtaining the super deduction or the SR allowance.
As with other assets in relation to which first year allowances have been claimed, a balancing charge will be payable on the disposal of the asset. However, if the asset is disposed of in an accounting period ending before 1 April 2023, the disposal value of the asset (calculated in accordance with capital allowances legislation) is multiplied by a factor of 1.3 to reflect the enhanced amount of the super deduction. Transitional rules apply to disposals made in accounting periods straddling 1 April 2023 and there is a similar balancing charge mechanism for disposals of assets which qualified for the SR allowance.
Although initially appearing very generous, the super deduction only applies to expenditure incurred before 1 April 2023, which is the date on which the main rate of corporation tax is due to increase to 25%. The effective rate of tax saved by the super deduction is 24.7% (19% multiplied by 130%). The introduction of a generous tax deduction at a time when the corporation tax rate is lower is likely to push forward expenditure into tax years 2021-22 and 2022-23 which will in turn result in lower levels of deductions once the increase to corporation tax has taken effect, further increasing corporation tax revenue in later tax years. This is reflected in the Budget costings which estimate that £4.87bn will be raised by the super deduction across tax years 2024-25 and 2025-26. It will be interesting to see if the take-up of the super deduction is as high as has been forecast by HM Treasury, and if it results in the predicted increase corporation tax revenue in later tax years.
Return to Budget 2021.
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