Super-deduction - timing is everything

02 March, 2022

Matthew Greene

Director, Capital Allowances, PwC United Kingdom

+44 (0)7730 067871

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As a tax advisor who has specialised in capital allowances for more than a decade, I was very excited when Rishi Sunak announced the “super-deduction” at the Spring Budget last year.

The aim of the relief was to encourage investment in improving productivity, a long-term ambition for the UK and something I am very keen to see. However, I found this encouragement taking the form of a capital allowance really interesting.

This announcement pushed capital allowances and tax up the boardroom agenda, suddenly politicians, journalists, finance directors and even chief executives were talking about it.

That was eleven months ago and, whilst the super-deduction is still a very positive step and most companies are keen to benefit from the regime where possible, a number of quirks in the legislation are starting to arise meaning that actually making a claim can be more difficult than originally envisaged.

The Super-deduction and the Special Rate allowance - how do they work?

  • The super-deduction is a 130% first year allowance for qualifying expenditure on relevant plant or machinery. In addition the SR Allowance is a 50% first year allowance on qualifying expenditure on relevant plant or machinery (which does not include plant or machinery qualifying for the super-deduction).
  • Cars are excluded, the asset acquired must not be second-hand and it cannot have been acquired from a connected party.
  • Both allowances are only available to companies within the charge to corporation tax.
  • Companies, who enter into a contract to acquire relevant plant and machinery for the purpose of their business on or after 3 March 2021 can potentially benefit from the reliefs.
  • To qualify the expenditure must be incurred (note that these rules aren’t always straightforward) between 1 April 2021 and 31 March 2023.
  • The claim must be made in the tax return of the company for the year in which the expenditure is incurred and, importantly, the asset must be owned by the company in that period as well.

Ownership

There are a lot of rules above so why am I focusing on the ownership point? The answer is because it has the highest potential for misinterpretation of them all, and businesses applying for the deduction are most likely to fall into common traps around it.. The super-deduction rules have been written in such a way that they require a company to almost always own the asset (e.g. have title) for a claim to be made in the year the expenditure is incurred.

This is different to claims for most other plant or machinery allowances, where a contract stating that a party shall or may become the owner of said plant or machinery means that the party is treated as the owner.

However, for the super-deduction and the SR allowance, if any expenditure is incurred in a period before legal title passes, then that expenditure will not qualify for the first year allowances (ever) and instead will only qualify for the normal writing down allowances. This may impact contracts with deposits, stage payments or simply those where payment is due prior to delivery and passing of title. For example, if title doesn’t pass until delivery, and that delivery occurs in a later period to when the expenditure is incurred then that expenditure will not qualify.

Given the super-deduction was specifically introduced to encourage investment in productivity-improving plant and machinery, and that such machinery tends to include at least some level of lead-time from ordering to delivery, this has the potential to significantly impact a number of businesses, denying them access to the headline tax reliefs.

Additionally, the rules can lead to some odd results where two companies with different year ends could order a piece of machinery with a three month lead time on the same day and, depending on their year-ends, one may receive a 130% first year deduction whilst the second may only receive 18% writing down allowances.

This amendment to the legislation was achieved in one subsection of the Finance Act 2021 and it is possible that some companies may be unaware of the change.

Managing the impact

Clearly, as the change was made to the legislation, the draftsman and Parliament intended for this change to be made; therefore companies affected should ensure that they are aware of the implications and that contracts are drafted in such a way to avoid this pitfall.

Considerations could be that contracts are written so that delivery or transfer of title is ensured within the year in which expenditure is incurred and that, commercially, the supplier is liable for a late delivery.

However, clearly there will be a number of contracts where, for whatever reason, this is not possible. In such cases, properly forecasting the impact is a sensible first step to understanding and, where possible, mitigating the effects.

How can PwC help?

We have a specialist team of dedicated capital allowances specialists made up of tax and surveying professionals who advise businesses on a daily basis, helping them to ensure they can comply with and benefit from the current capital allowances regime.

If you think you may be affected by these rules and wish to discuss them further please get in touch with me or your usual PwC contact and we’d be happy to talk to you.

Matthew Greene

Director, Capital Allowances, PwC United Kingdom

+44 (0)7730 067871

Email

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