How super is the super-deduction?

How super is the super-deduction?

Regardless of how effective the super-deduction has been in incentivising investment and boosting productivity, economists and tax professionals alike agree that a permanent successor to the temporary capital spending allowance is urgently needed, says Natasha Spicer, senior manager at Menzies

How super is the super-deduction?

Having recently published a consultation, the UK government is seeking views from businesses about the super-deduction and ideas to modernise capital allowances more generally. With inflation at a 40-year high, the UK economy contracting and signs that low levels of business confidence are undermining investment, what should the government do next?

The super-deduction was introduced in March 2021 to extend tax relief to businesses investing in qualifying plant and machinery. At first glance, it seemed quite a generous scheme; offering businesses an opportunity to benefit from a first-year capital allowance equivalent to 130% of the value of their capital expenditure.

However, it soon became apparent that the scheme is more complex, with it also possessing some significant limitations.

Despite being billed by Chancellor Rishi Sunak as “the biggest tax cut for business investment this country has ever seen”, the response from industry to the super-deduction has been lukewarm. The Bank of England recently slashed its forecast for the impact that the tax break is expected to have on business investment this year to 11%, down from 19% in August last year.

Significant limitations

Among the limitations noted by businesses and their tax advisers, the super-deduction is only available on the purchase of new and unused assets – not second-hand – and there is only a relatively small window of time in which to claim the relief, between April 1, 2021, and March 31, 2023.

For businesses with a year-end that straddles the scheme’s end date, the relief must be apportioned based on the number of days falling prior to April 1, 2023, over the total days in the accounting period. This could reduce the amount of tax relief applicable significantly. For example, for a business with a year-end on December 31, 2023, the super-deduction would be limited to 107% of the value of any qualifying capital expenditure.

Other limitations include the clawback rules that apply to the super-deduction. If a business disposes of a main pool asset that has been claimed under the super-deduction, a balancing charge will be incurred. If this asset is sold in a period commencing before April 1, 2013, these proceeds may also have to be grossed up to consider the super-deduction claimed. For example, if the asset is sold for £1,000, the balancing charge payable to HMRC should be calculated based on £1,300.

Capital allowance regime reforms

In a consultation published on May 9, 2022, the government is seeking views on proposals to reform the capital allowances rules to support enterprise and growth by July 1, 2022. The Spring Statement also flagged some potential changes that might require further consideration.

Among the changes that could be implemented is a proposal to fix the rate of Annual Investment Allowance (AIA) at £500,000, for an extended period. While the current rate of AIA is set at a higher rate (£1m), it is thought that greater certainty, would prove more beneficial; enabling businesses to plan ahead. Fixing the rate of AIA at £500,000 for a period of say five years would allow businesses to plan their investment strategies with this in mind.

It has also been suggested that ‘writing down allowances’, which apply to main pool and special rate expenditure could potentially be increased. For example, ‘integral features’ sit in the ‘special rate’ pool for capital allowance purposes. Expenditure on integral features such as new electrical, cold water, and HVAC systems currently qualify for 100% AIA or 50% super-deduction if the expenditure is made between April 1, 2021, and March 31, 2023.

However, any expenditure on new integral features, which is over and above the limit set for these allowances, is currently written off at a rate of just 6% per year, and any decision to increase this to 8% per year, would be welcome.

Another area that is ripe for reform is Structures and Building Allowances. Introduced in 2018, these allowances apply to capital expenditure on structures and buildings used for qualifying activities. In 2020, these allowances were increased from 2% to 3%. However, many businesses will be hoping there is scope for further improvement. Naturally, any decisions that are taken to reform capital allowances rules will have to consider the latest economic and fiscal position.

With the economy shrinking and rising energy and fuel costs creating cashflow challenges for many businesses, it is vital that the government takes appropriate steps to incentivise business investment and boost confidence. Reforming capital allowances rules could make a big difference, but as has been shown with the super-deduction, too much complexity and a lack of certainty can quickly negate any intended benefits.

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