Super Deduction Explained
Since the announcement of the Super Deduction, we have been involved in a number of situations where a thorough understanding has proven crucial. Below we share our key findings of the potential downsides/risks for those considering Super Deduction. As with most aspects of Capital Allowances, it is important to apply legislation to cases specifically in order to make the best use of the available tax breaks available.
Finance Bill 2021 (FB21); Super Deduction
First the basics – the super deduction only applies to:
- companies within charge to Corporation Tax
- covers expenditure incurred from 1st April 2021 to 31st March 2023 (excluding expenditure falling in this period where the contracts were entered into prior to 3rd March 2021)
- only relates to new and not used/second-hand assets
- applies an enhanced first-year allowance (FYA) as follows:-
When first reading the balancing charge disposal enhancement clause, which only applies to the main rate pool ‘super deduction’, we assumed that qualifying assets would be taken to single asset pools however, this isn’t actually the case. Rather than being taken to the relevant pool, the balancing charge, enhanced as appropriate, will simply be taken directly to taxable profits rather than to the relevant pool.
The enhanced disposal balancing charge doesn’t apply to Special Rate pool deductions.
In our view, the disposal rules at section 4 of the legislation are drawn up in such a complicated way for two main reasons, the first being that it will effectively function almost as basic anti-avoidance legislation, and the second to do with the wider context. It needs to be borne in mind that 01/04/23 is not only the date that the super deduction rules end but also the date the Corporation Tax rate rises from 19% to 25%. We feel the second point is to do with smoothing out tax asymmetry and discouraging early disposal of assets on which a super deduction has been claimed.
Looking at the legislation starting at section 4, in chronological order, the following would apply for cases where a super deduction has been claimed:-
- The balancing charge crystalises in the chargeable period in which disposal takes place in all cases (FB21/s4(2))
- Where disposals take place in a chargeable period that ends prior to the 01/04/23 incentive end date the balancing charge is enhanced to 130% by applying the ‘relevant factor’ of 1.3 to the disposal proceeds (FB21/s4(7)).
- If the disposal occurs in a chargeable period that straddles the 01/04/23 the balancing charge is time apportioned by reference to the number of days that fall before and after 01/04/23 to produce a ‘hybrid’ balancing charge enhancement rate. Where this applies the balancing charge enhancement will always be >1 but < 1.3.(FB21/s/s4 (3), (6) and (8)). However, the effect of what would be a ‘hybrid’ CT tax rate on this balancing charge also needs to be factored in (see examples).
- If the disposal chargeable period falls wholly after 01/04/23 the balancing charge will be the figure arrived at by reference to s61, won’t be enhanced but will be taxed at the new, higher rate of Corporation Tax (CT).
Examples to show workings:
For each example, we have assumed a 12-month account/chargeable period ending on 31 March (unless shown otherwise), used an asset purchased for £100K in the APE 31/03/22 attracting a super deduction of £130,000 and sold at market value for £50,000 (s61 table, item 1). We have also assumed that the ‘relevant expenditure’ referenced in FB21/s4(5) is the same as the super deduction expenditure, which we feel will be the position for most cases.
Disposal in APE 31/03/23
As AP ends prior to 01/04/23, section 4(7) of FB21 applies.
Disposal proceeds of £50,000 are enhanced by the s4(7) ‘relevant factor’ of 1.3 to give a balancing charge of £65,000 that is taken to taxable profits.
For this period the CT rate is 19% so the tax charge is £12,350.
(note for this we have had to play around with the APE to create a ‘hybrid’ AP, just go with it…)
Disposal in APE 30/09/23, so hybrid AP falling 183 days prior to 01/04/23, 182 days after.
FB21/s4(8) therefore applies, computation set out in legislation produces the following:-
183/365= 0.5 x 0.3= 0.15 + 1+ 1.15 (relevant factor)
Balancing Charge 50,000 x 1.15 = 57,500 taken to taxable profits.
For CT in this period, 6 months chargeable at 19%, 6 months at 25% gives a ‘hybrid’ tax rate of 22%.
Tax charge £12,650
Disposal in APE 31/03/24, so whole AP falls after super deduction period.
Whilst FB21/s4(8) technically applies, there is no actual adjustment required as the whole AP is post 01/04/23.
Disposal proceeds 50,000 not enhanced, so balancing charge £50,000
For CT the tax rate is now 25% so the tax charge is now £12,500
If these complex disposal rules weren’t there the 1.3 balancing charge enhancement would apply to all subsequent disposals, irrespective of the chargeable period.
In that case, the tax due in example 3 would become £16,250, representing a 30% increase in tax on disposal compared to a disposal as per example 1. If we added a zero or two to our example expenditure figures, this becomes material and could act as an incentive to dispose of assets early, which would defeat the purpose of the legislation.
With the disposal rules as written, the tax asymmetry is mostly smoothed out, with only £400 variance between the three example tax figures, which would fall (from an HMG perspective) within acceptable tolerances. These rules should also discourage anyone from trying to work the system with some sort of avoidance arrangements by removing the potential tax incentive (quite clever really).
Answers to frequently asked questions:
Q) Does the change in the tax treatment of the asset only apply if the asset is bought and sold in the two-year window of the super-deduction?
A) Sort of….it also applies to APs that fall partly prior to 01/04/21 for acquisitions and post 01/04/23 for disposals.
Q) Noting that the change in the disposals legislation applies to General Pool items only, does it only relate to “moveable” items of plant and machinery only (chattels)? I assume it relates to all plant and machinery, not just “moveables”.
A) It will apply to everything that is Plant and Machinery and not otherwise excluded.
Q) Does it potentially have any impact on a Section 198 Election?
A) No. The legislation at FB21/S4(9) makes it clear that a ‘negative balance’ can’t be taken to the pools where the super deduction has been claimed so carrying value will be nil and not, to take our £100,000 purchase as an example, minus £30,000.
The Super Deduction has proven more complicated than originally thought after first hearing the budget announcement. If you and your clients are spending significant capital building or improvement property, please contact us to ensure maximum tax relief is secured.