Companies who are making significant capital investment over the next two years received a welcome boost from the budget. The budget introduced a new super-deduction of 130% for qualifying capital expenditure. The Chancellor explained a company spending £10m would currently achieve tax relief of £2.6m in the year of expenditure, whereas they would achieve tax relief on £13m under the new regime.
This was a surprise to most commentators, including ourselves, as this type of initiative has not previously been available on Plant & Machinery Capital Allowances.
The new measure is only temporarily being introduced for two years for expenditure from 1 April 2021 to 31 March 2023. This will allow a 130% deduction for investments which would normally qualify for 18% plant and machinery writing down allowances. The new rules also allow for a first year allowance of 50% on the special rates pool expenditure usually written down at a rate of 6%.
This is a significant increase and acceleration of tax relief for many companies that would currently achieve 100% tax relief on the first £1m of spend. This could be particularly beneficial for those companies benefitting from an extended loss carry-back period and generate significant corporation tax refunds.
It should be noted there are likely to be a number of exclusions which we already know includes contracts entered into before 3 March 2021 even if expenditure is incurred after 1 April 2021.
Disappointingly super-deduction is only available to companies within the charge to corporation tax. Unincorporated businesses cannot benefit under this new rule but will continue to be able to claim the capital allowances at 100% of up to £1m under the annual investment allowance. The annual investment allowance had previously been extended for another year until 31 December 2021 when it is due to revert back to £200,000. This is when some unincorporated businesses may notice a wide gap in the timing of tax relief as expenditure in excess of the annual investment allowance will be written down at either 18% (Main Rates Pool) or 6% (Special Rates Pool).