Capital allowances super-deduction explained

*excluding expenditure falling in this period where the contracts were entered into prior to 3rd March 2021)

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.

Example 1

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.

Example 2

(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

Example 3

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

Conclusion

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).

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.