Time is running out to take advantage of super deduction capital and special rate first year allowances

1st March 2023

The deadline for businesses to benefit from super deduction capital allowance and special rate first year allowance is fast approaching. On 31 March 2023, the 130% super deduction capital allowance and 50% special rate first year allowance schemes are due to end.

What are the allowances?

On 3 March 2021, the Chancellor introduced two new temporary first year allowances – the ‘super deduction capital allowance’ and the ‘special rate first year (SR) allowance’, for capital investments that are made between 1 April 2021 and 31 March 2023.

Both the super deduction and the SR allowance provide businesses that purchase qualifying equipment, a much higher tax deduction in the tax year of purchase than they would otherwise normally incur. The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.

The super deduction and the SR allowance are only available to companies and non-resident landlords. It can be used alongside the ongoing Annual Investment Allowance (“AIA”) which already provides 100% relief for costs of qualifying plant and machinery in the tax year of purchase, and only where:

  • The contract for new, unused plant and machinery was entered into after 3 March 2021; and
  • Expenditures are incurred after 1 April 2021.

The super deduction capital allowance and the SR allowance are not available to individuals, sole traders, partnerships or LLPs.

Whilst not all companies can claim in the period of investment, the qualifying groups are still wide:

  • The ‘super-deduction’ provides an allowance of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing-down allowances (“WDA”); and
  • The SR allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate WDA, including integral features in buildings and long-life assets.

As capital allowances allow tax payers to write off the cost of certain capital assts against taxable income, some example of assets which may qualify for either the super deduction capital allowance or the SR allowance include, but are not limited to:

  • Solar panels;
  • Computer equipment and servers;
  • Tractors, lorries, vans;
  • Ladders, drills, cranes;
  • Office chairs and desks;
  • Electric vehicles charge points;
  • Refrigeration units;
  • Compressors; and
  • Foundry equipment.

As such, the super deduction and the first year SR allowance will allow companies to lower their corporation tax bill and investing companies will also benefit from a 50% first-year SR allowance for qualifying special rate (including long life) assets.

What does this mean?

From 1 April 2023, the super deduction capital allowance and the SR allowance scheme will expire.

Whilst the disposal value is calculated the same way as when an asset is sold, the amounts incurred on the assets claimed as either ‘super deduction capital allowance’ or ‘SR allowance’ will automatically be considered as a balancing charge. Additionally, if the date of the disposal is after 1 April 2023 then the 25% corporation tax rate will apply to the balancing charge, rather than the current 19%.

Businesses who wish to take advantage of either allowances are encouraged to do so before 31 March 2023.

Unlike AIA, there is no limit on the amount of capital investment that can qualify for the super deduction capital allowance. However, it should be noted that there are exclusions to the two temporary allowances, as it does not apply to:

  • petrol, diesel, hybrid or fully electric cars;
  • second-hand assets;
  • connected party transactions; nor
  • expenditure on assets for leasing.

Furthermore, for businesses that have plans for a major property investment project, that is likely to exceed the £1 million 100% AIA cap, should now review their refurbishment and improvement plans and give careful consideration as it may be beneficial to carry this out before 31 March 2023 to maximise their ability to claim the tax reliefs.

If you need legal advice on the super deduction capital allowance, special rate first year allowance any real estate mattes, contact our specialist property lawyers.

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