“Looks like a job for the Super-Deduction!”
On 3rd March the Chancellor of the Exchequer, Rishi Sunak, announced the introduction of a new “super-deduction” of 130% for most new plant and machinery expenditure that normally qualifies for 18% main rate writing down allowances (main rate “tax depreciation”). The measure will affect any relevant expenditure incurred from 1st April 2021 up to and including 31st March 2023. This will give companies a tax benefit of 24.7p for every £1 spent on qualifying plant and machinery, which is 5.7p more per £1 than previously provided (an increase of 30%). This does not include cars (even fully electric ones), second-hand assets, or plant and machinery that has been purchased in order to be leased out. It does however include trucks, lorries and diggers. It is important to note that expenditure relating to contracts entered into prior to 3rd March 2021 are excluded, even if expenditures are incurred after 1st April 2021. Hire-purchase type arrangements can be eligible for the super-deduction, provided that payments are being made towards the acquisition of the asset and legal ownership of the asset can pass to the lessee if an option can be exercised, or subject to another trigger event occurring.
Additionally, there will be a 50% “first year allowance” on most new plant and machinery purchases which normally qualify for 6% special rate writing down allowances from 1st April 2021 up to and including 31st March 2023 – this includes integral features within a building (e.g. heating systems, most solar panels, electrical systems), thermal insulation of buildings, and long-life assets. Although this is a welcome measure, only a small number of businesses will be able to benefit from it. In order to benefit, businesses will need to be spending over £1m on “special rate” plant and machinery purchases. This is because these companies could still benefit from the £1m 100% “Annual Investment Allowance” until the end of 2021.
It is important to note that there is no “spend cap” for the new super-deduction measure, which means that the Annual Investment Allowance of £1m as well as R&D Allowances are effectively irrelevant during the two year window in which the super-deduction applies. This means that companies which are planning to spend over £1m per annum on plant and machinery in the next five years should consider bringing their purchases forward. The same can also be said for companies with lower annual plant and machinery purchases but this will very much depend on whether the current £1m Annual Investment Allowance remains in place after the end of 2021. If it does, then after 1st April 2023 these companies will still benefit from a tax benefit of 25p for every £1 of spend due to the increase in corporation tax to 25%.
As well as the previously highlighted exclusions, it is also important to consider the potential disposal (sale) of any assets which qualify for the super-deduction. This is because new disposal rules apply to these assets – they are treated as balancing charges (taxable profits), instead of the usual treatment of being deducted from the main capital allowance pool. The disposal value will also be uplifted by 30% to take into account the fact that relief on the original expenditure was greater than 100%. Where disposals occur in accounting periods straddling 1st April 2023, the uplift will be calculated on a pro-rata basis. This rule does not apply to the 50% first-year allowance for special rate expenditures. While the 130% uplift may seem attractive at first glance, the disposal proceeds may also be taxed at higher rate. In addition to this, even if a disposal takes place in an accounting period commencing after 1st April 2023, the disposal will be taxed at the higher corporation tax rate of 25%. This therefore dampens the benefit of the super-deduction for companies with significant asset disposal proceeds, which typically sell their assets after a few years of ownership.
We believe that in addition to the super-deduction, which we welcome, the introduction of a commensurate super-deduction (e.g. 150%) for assets eligible for R&D Allowances would also have been a useful measure – this would further incentivise spending on plant and machinery specifically used for R&D, in line with the government’s ambitions of increasing R&D spending from 1.7% of GDP to 2.4% by 2027. In the Treasury’s R&D tax relief consultation, which runs until 2nd June 2021 and seeks to gather feedback on the reform of the SME and Large Company (RDEC) schemes, one of the key questions, amongst others, is whether capital expenditure should be included in any amended regime. Other key questions include:
- Should the two schemes (Large Company and SME) should be consolidated into one and what would be lost if this happens? Are the current differences in benefit rates between the two schemes reasonable?
- What could be improved in order to incentivise the R&D your company does or might consider doing?
- To what extent do the current effective rates of R&D tax benefit affect your firm’s investment decisions?
- Should there be a departure from the current way claims are assessed through the Corporation Tax Self-Assessment system e.g. by providing more supporting information up-front, instead of retrospectively?
- Should it be possible to claim for activities which benefit wider society that are not covered by the current R&D definition and, if so, which?
- Do you think R&D tax reliefs could better incentivise R&D with specific social value, for example developing green technology? Could R&D tax reliefs be used to disincentivise R&D in certain fields?
- How could the current scheme be redesigned to better support R&D in certain regions of the UK?
- What proportion of your R&D expenditure is treated as capital and what would be the impact on your R&D activities of increased relief for capital expenditure? (see above)
- How could the government distinguish between work that needs to take place abroad and which benefits the UK, and that which doesn’t?
- What proportion of your company’s R&D expenditure is undertaken outside your company and why? What are the benefits and drawbacks of subcontracting, whether overseas or domestically?
- How can HMRC identify the supporting activities which are most valuable for R&D, while providing a clear boundary to assist companies in claiming and HMRC in administering?