Pitfalls of Super-Deductions and First Year allowances

The Super Deduction allowance is an extremely attractive tax incentive allowing companies to achieve a 130% deduction in the year of expenditure on the cost of qualifying assets against taxable income which equates to 24.7p relief for every £1 spent. In addition, there is a first year allowance of 50% available for special rate expenditure which normally only attracts 6% (SR Allowance). Although these allowances are extremely attractive, it is also important to be aware of the potential pitfalls.

Clawback of Relief

HMRC have included legislation to avoid the abuse of the relief by companies. If Super Deduction or SR Allowance is claimed on an asset which is subsequently disposed of, the company will be taxed on a balancing charge equivalent to the proceeds received in the year of disposal irrespective of how long the asset has been owned. The proceeds will not be allocated to the relevant pool as would happen in a normal disposal.

An example of the cashflow position is as follows:

• During the year ended 31 March 2022 a claim is made for Super Deduction on an asset costing £3m. The impact of this is that it reduces the Corporation tax payable by £741k (£3.9 m @ 19%)
• During the year ended 31 March 2025, the asset is disposed of for £1m. This results in a balancing charge and tax payable at 25% amounting to £250k

If an asset on which Super Deduction has been claimed is disposed of prior to 1 April 2023 there will be an additional clawback of relief. A factor of 1.3 will be applied to the proceeds which will be time apportioned as appropriate depending on the company’s accounting period.

Companies will also need to consider the impact on the deferred tax to be recognised in the company’s accounts. If the company intends on selling assets which have been subject to a claim, it will need to consider the level of deferred tax that will be required to recognise the fact that the tax benefit will reverse in the future. If the disposal is expected to take place prior to 1 April 2023, there will be a requirement to consider the reversal of the enhanced element.

Date Expenditure is Incurred

The date expenditure is incurred is key when looking to make a Capital Allowances claim.

Expenditure that is incurred before the commencement of trade would typically be deemed to be incurred on the date that company commences to trade. However, this rule does not apply when making a Super Deduction claim as only assets that were actually purchased within the period between 1 April 2021 to 31 March 2023 can attract the relief.

In addition, if the expenditure incurred is as a result of a contract entered into before 3 March 2021 even if an unconditional obligation to pay arises within the period between 1 April 2021 to 31 March 2023, a claim for Super Deduction or SR Allowances cannot be made.

Reduced relief

Due to the increase in Corporation tax rates from 1 April 2023 to 25%, the rate of Super Deduction for companies where the accounting period straddles 1 April 2023 is proportionately reduced depending on when the accounting period ends. This reduced rate applies even though the expenditure is incurred in the period to 31 March 2023.

For example:

• The rate at which a company with an accounting period ended 30 September 2023 will be 115% (183/365 days x 30% + 100%) as opposed to 130%

Excluded assets

It is important to be aware that there are groups of assets that are excluded from the attractive reliefs, including second hand assets, cars, long life assets and leased assets. The leased asset exclusion was subsequently amended by HMRC to allow companies to make a claim on qualifying expenditure for Super Deduction and SR allowances on properties that are rented out.

There is no doubt that companies can benefit from these attractive reliefs. However, before making a claim it is crucial to consider the overall position, taking into account all the associated pitfalls.

If you require assistance in relation to available tax reliefs, please contact Lesley Connon, Corporate Tax Senior Manager.

Find out more about our Corporate Tax service.