The End of the Super Deduction – Illustration for Companies with a December Year End
As the Super Deduction comes to an end, many businesses may be asking the best way to take advantage of this generous relief before it's gone, but the answer is not as straightforward as spending as much as possible before it’s gone.
For a refresher and primer, the Super Deductions offers 130% first year relief on qualifying main pool plant and machinery incurred between 1st April 2021 and 31st March 2023.
Complications arise however when an accounting period spans the end date of 31st March 2023. The “bonus” 30%, that separates the Super Deduction from the 100% offered by the Annual Investment Allowance, is reduced based on the amount of accounting period before the Super Deduction end date.
For a company with a December year end, consider the effect of incurring main pool expenditure in the following time periods:
Expenditure incurred BEFORE the year end 31-12-22
Deductions of 130% arise, at a tax rate of 19%, equivalent to 24.7p saving per £1 spent. There is no cap on the amount you can claim at this Super Deduction rate. It’s great to utilise this as much as possible up to your 2022 Y-E.
Expenditure incurred between 01-12-22 and 31-03-23
If the year-end spans the end date of the super deduction, the enhanced amount is reduced slightly, based on the number of months each side of the end date. Qualifying expenditure incurred in this window will generate deductions at c.107.5% at a tax rate of 19%, equivalent to 20.4p saving per £1 spend. There is no cap to the amount of relief claimed at this rate.
Expenditure incurred after 01-04-23
For this spend the super deduction is gone but the tax rate is higher. The Annual Investment Allowances becomes the best relief, but is limited to £1m. For the first £1m of plant and machinery spend in the group, relief will be generated at 100% with a 25% tax rate, equivalent to 25p per £1 spent. For any qualifying expenditure incurred over and above the £1m limit in that year within the group, the deductions will arise over time at 18% or 6% per annum, instead of the 100% first year allowance offered by the AIA. Note that, for spend over that £1m limit, the total relief is still 25p on the £1, but it is obtained over a number of years instead of immediately (in the year of claim).
This leads to the following recommendations:
- Main pool spend incurred before the 31 December 2022 is great. Generous and unlimited relief.
- If you expect the company or group of companies to run out of AIA in the year end 31 December 2023, make the most of the final 3 months of the Super Deduction up to 31 March 2023, and preserve that AIA limit for spend later in the financial year.
- If the company or group of companies does not expect to use all of their £1m Annual Investment Allowance in the year ended 31 December 2023, then there would be limited benefit in accelerating expenditure to before the end date of the super deduction.
If you have any question about your business’s capital expenditure and the capital allowances your entitled to, don’t hesitate to get in touch at cal@yes.tax
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