This enhanced relief is called a Super-Deduction. It’s intended to encourage investment and kick-start the economy after the shocks of Brexit and Coronavirus.
Of course, a cynic would suggest that it’s also designed to discourage companies from delaying investment decisions until the Corporation Tax rate increases in April 2023, when investments would attract tax relief at 25% rather than 19% – all while allowing the Chancellor to sound generous and helpful.
The Super-Deduction applies to plant that would ordinarily qualify for the 18% main pool rate of writing down allowances. A parallel enhancement applies to plant that would otherwise fall into the Special Rate Pool and attract relief at 6%. Called the SR Allowance, this boosts tax relief to 50% in the first year, with the remaining 50% of the cost getting the standard 6% writing down allowance on a reducing balance basis from year two onwards.
These temporary enhanced rates of relief work alongside the Annual Investment Allowance (AIA), which means a little thought is required of how to maximise the benefit of the allowances. The AIA gives 100% first year relief on plant and machinery up to £1m. So, rather than allocate the AIA to all plant and machinery it is now optimal to use the super-deduction to grant 130% relief on main pool plant, and reserve the AIA for Special Rate Pool items, giving 100% relief instead of the 50% SR Allowance. It will only make sense to claim the SR Allowance if the AIA has already been exhausted or for some other reason is not available.
It’s also worth projecting forwards and predicting how long the asset will be retained in the business to factor the full impact of the tax relief into the investment decision. With the enhanced relief comes an enhanced balancing charge if the asset is disposed of before the end of March 2023. Thereafter, the disposal will generate a balancing charge which may be subject to tax at the increased 25% rate.
Naturally the legislation isn’t straightforward and needs careful navigation to avoid pitfalls. Where an asset is leased to another user, for example, the super-deduction is not available – unless it’s leased as part of a building, in which case it may be saved from the exclusion. Or not, depending on the nature and use of the individual asset in question.
As with most things to do with tax relief, specialist professional guidance is recommended as there are a number of angles to consider, a few banana skins to avoid and several hoops to jump through before a robust and reliable claim can be made.
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