Back in March 2021 the government announced the capital allowances Super Deduction at the same time as the increased tax rate. This was no coincidence; at its best the 130% enhanced first year allowances provides a level of relief equivalent to obtaining a 100% first year allowances at the higher 25% tax rate. The relief was designed to stimulate investment following the pandemic and encourage companies not to delay their capital investment until after the tax hike.
This article covers everything you need to know to optimise your Super Deduction claim as we approach the end of this generous relief.
A Quick Recap – Super Deduction Basics
For expenditure incurred between 1 April 2021 and 31 March 2023, the Super Deduction offers 130% enhanced first year allowances for main pool expenditure and 50% first year allowances for special rate pool expenditure. Generally, the 130% rate is the more important, and will be the focus of this article, as special rate expenditure can also benefit from the Annual Investment Allowances (AIA), offering 100% first year allowances. The 50% Super Deduction is only useful when the company has no remaining AIA (limited to £1m per group) to allocate to the special rate expenditure.
A few additional restrictions should be considered for the Super Deduction:
- The contract for the relevant works/asset must have been agreed after 3 March 2021
- The asset may not be second hand, a car, or purchased for leasing (with some exceptions)
- The relief is only available to companies
The claim must be made in the year the expenditure is incurred, and some clawbacks exist where the asset is sold for proceeds.
Final Year Reduced Relief
While the 130% enhanced relief is excellent, this deduction may be slightly reduced for periods spanning the Super Deduction end date of 31 March 2023. The extra 30% is what separates the Super Deduction from AIA, but this 30% enhancement is scaled down depending on how many days of the accounting period fall after the end date.
For example, for a company incurring qualifying expenditure in the year ended 30 September 2023 has 6 months of the accounting period falling after the end date. Expenditure qualifying for Super Deductions in that period will attract and enhanced relief of c.115% (100% + 30% x 6/12). This example is calculated in months for simplicity, but in practice the formula should be calculated in exact days.
Note that the expenditure would still need to be incurred before the end date to obtain the 115%. Any spend incurred after 31 March 2023 will not qualify for Super Deductions.
When is Capital Expenditure Incurred?
Given that the end date of the Super Deduction will become pivotal to the amount of relief available, a solid understanding of when capital expenditure is recognised will help identify the amount of relief available.
Expenditure is recognised on the date that the obligation to pay becomes unconditional. This is typically on delivery, even where a line of credit may result in payment after delivery. For large capital projects with milestone payments, the expenditure is incurred when the work is certified, for example when a stage payment becomes payable.
One exception should be noted; where payment occurs more than 4 months after the unconditional obligation to pay arises, the date of recognition becomes the payment date. With this in mind, companies should be sure to pay invoices relating to assets qualifying for the Super Deduction within four months, to prevent the expenditure being recognised at a later date.
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