13 July 2022
Capital Expenditure and the Super-Deduction
Introduced in April 2021, in basic terms the super-deduction tax break enables companies (but not sole traders and partnerships) to claim relief for 130 per cent of what they spend on equipment and machinery. This government incentive was introduced to encourage companies to invest in capital expenditure between 1st April 2021 and 31st March 2023 and help to drive the economy in the wake of the Covid-19 pandemic.
Whilst from a cash-flow perspective the super-deduction appears to be a very attractive proposition, we pose the question….. is claiming the super-deduction always the best option?
Less well publicised by the Government, is that companies could be liable to a balancing charge of up to 130% of the disposal value if they sell an asset before 1st April 2023 on which the super-deduction has been claimed. This will however depend on the company’s accounting period, and where disposals occur in accounting periods straddling 1 April 2023, a factor lower than 1.3 will apply. For disposals in accounting periods beginning after 31 March 2023, the balancing charge will be restricted to 100% of the disposal value.
Companies should also be mindful of the increase in corporation tax rates from 19% to 25% in April 2023, which could see any advantages arising from bringing forward capital expenditure in order to benefit from the super-deduction, being nullified by the additional 6p in the £1 of corporation tax that represents an increase of over 31.5% on the 19% rate of tax current payable. Consequently, companies looking to invest under the £1m Annual Investment Allowance limit, may still be better off deferring expenditure on new machinery until after 31st March 2023.
Whilst the main rate of corporation tax is set to rise from 19% to 25% from April 2023, the introduction of the small profits rate of 19%, which will attract marginal relief for companies with profits that fall between the lower limit of £50,000 and the upper limit of £250,000, further complicates the tax planning consideration for the timing of capital expenditure.
How can Haines Watts help?
We advise clients with a broad range of tax related matters across a number of sectors throughout the South West.
If you should require any advice concerning investing in plant and machinery and the timing of expenditure for capital allowances, please contact us and we would be pleased to assist.
