From the 1st April 2021 the Government introduced the super deduction and special rate first-year allowance to help businesses invest in qualifying plant and machinery equipment (PME).
This new scheme will be available till the 31st March 2023, providing an incentive to invest in their business. Eligible claims will qualify for:
- A super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for main rate writing down allowances
- A first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for special rate writing down allowances
This super-deduction allows businesses to reduce their tax obligations by nearly 25p for every £1 spent. Similarly, businesses that are entitled to the first-year allowance for plant or machinery could access a reduction in tax of nearly 10p for every £1 spent.
What Expenditure Qualifies
The majority of tangible capital assets used in the course of a business are considered as plant and machinery for the purposes of claiming capital allowances and as such there is not an exhaustive list available. However, the following may be able to benefit from these new capital allowances:
- Compressors
- Solar panels
- Tractors, lorries and vans
- Foundry equipment
- Office chairs and desks
- Computer equipment and servers
- Electric vehicle charge points
- Ladders, drills, cranes
- Refrigeration units
As may have been expected cars do not qualify for this relief, they have been specifically excluded.
To benefit from the relief the assets purchased must not be second hand or refurbished, they must be brand new.
The general rule is that the expenditure must be incurred on or after the 1st April 2021 and before the 1st April 2023. Expenditure is “incurred” on an asset as soon as there is an unconditional obligation to pay for it. Typically, this is the date of delivery but it can also be the date when a certificate is issued. However, super-deductions are not available where the contract to buy the PME was entered into before 3 March 2021. Hence, any PME ordered before that date will not attract super-deductions.
The relief is only available to incorporated companies, but unincorporated businesses continue to benefit from the Annual Investment Allowance (AIA) which permits a deduction of 100% for qualifying plant or machinery expenditure up to £1 million.
How are disposal proceeds dealt with?
Additional rules have been drafted on how proceeds are taxed for assets on which a Super Deduction (130%) has been claimed and depends on the date on which a disposal takes place.
If a disposal takes place in an accounting period that commences before the 1st April 2023, the amount is determined as follows:
- Divide the number of days before the 1st April 2023 by the total days in the accounting period
- Multiply that amount by 0.3, and
- Add 1 to the above result
This means that for periods ending on or before the 31st March 2023, proceeds are taxed at 130% of the amount received, with periods straddling 1st April 2023 receiving a hybrid rate. For periods starting on or after 1st April 2023, proceeds remain taxable at 100% of the proceeds received.
However…
Normally, on disposal of plant in the main pool, the proceeds received are deducted from the overall pool balance. As the pool balance is written down at 18% per annum, this effectively taxes the proceeds over several years.
Under the new regime, proceeds received are taxed when received and therefore taxable upfront.
Example a)
A company buys a piece of machinery for £500,000 in the year ended 31st March 2022 which they then sell in in the following accounting period to 31st March 2023 for £350,000.
What are the tax consequences?
Year of purchase – 31st March 2022
£500,000 x 130% = £650,000
£650,000 x 19% = £123,500 tax saving
Year of disposal – 31st March 2023
£350,000 x 130% = £455,000
£455,000 x 19% = £86,450 tax liability
An overall tax saving of £37,050
Example b)
Using the above example but rather than a 31st March 2022 and 31st March 2023 year-end, we use 31st December 2022 and 31st December 2023 year-end.
Year of purchase – 31 December 2022
£500,000 x 130% = £650,000
£650,000 x 19% = £123,500 tax saving
Year of disposal – 31 December 2023
Days before 1st April 2023 – 90
Total days in accounting period – 365
90 divided by 275 = 0.25
0.3 x 0.25 = 0.075
0.075 + 1 = 1.075 or 107.5%
£350,000 x 107.5% = £379,750
£379,750 x 23.5% = £89,241.25 tax liability
An overall tax saving of £34,258.75
(Note: Tax rate assumed to be 23.5% based on the rise in Corporation Tax rates from 1 April 2023)
Without going into too much more detail, rules have also been brought in to tax 50% of disposal proceeds upfront for assets on which SR Allowance Expenditure (50%) has been claimed, although this is not subject to any time limit in the future.
Find out more
If you are looking to invest in plant and machinery equipment it would be worth speaking to our tax team beforehand. For more advice on these and other existing capital allowances, please book an appointment here.