Super-deduction: Up, up and away for UK plc?
Now that the dust has settled on what has been the single biggest change to the Capital Allowances regime since its introduction in the 1960’s, it’s an opportune time to reflect. How effective is the 130 percent super-deduction likely to be in driving investment decisions in boardrooms up and down the country?
Rishi’s £26 billion cash giveaway
The old saying goes that the tax tail should never wag the commercial dog, but the furore surrounding the super-deduction is completely understandable. It is the first time ever that the government has given away tax relief over and above the 100 percent rate, providing both a timing benefit and an absolute benefit of 6p for every £1 invested.
There is no upper limit on the amount that can be invested during the two year window (1 April 2021 – 31 March 2023), it is equally applicable to software as it is to property, plant and equipment, and it is now open to real estate investors as well as traditional trading businesses. There is seemingly little to dislike about Rishi’s £26 billion investment bonanza, which is why it has caught the attention of the C-suite as well as procurement, IT, supply chain and finance as well as tax teams.
However, it is always important to put things into perspective. Because of the way the relief operates, there will be a significant number of businesses who realistically won’t see the benefit because of their tax attributes, or because they have a particular type of asset base, or because they are put off by the complexity, all of which would seemingly run counter to the Government’s intentions.
Cash is king
The super-deduction is an allowance that can be offset against taxable profits, either now or through a loss carry-back/ loss carry-forward claim. So, if you are a business that has profits and has been or will be paying tax in the foreseeable future, it’s great news.
However, for many this has been all but ruled out following years of uncertainty around Brexit and the global pandemic, so the potential to receive a benefit at some indeterminate time in the future is not exactly going to get the CFO scrambling for his/her wallet any time soon.
That said, it is always worth modelling the relevant cash flows before ruling it out, because UK tax rules are so complex nowadays – like for example the restrictions on losses carried forward – that the benefit might arrive sooner than you think.
Watch the small print
With headline-grabbing legislation you always need to check the small print, and Finance Act 2021 is no different. The result is that many businesses and advisors are grappling with a number of complex issues:
- The super-deduction must be claimed in the year the expenditure is incurred. For multi-year projects the detail for a capital allowances claim is often not retrieved until the assets begin depreciating in the accounts. But rolling the claim up into the final year is generally not possible and it may well be too late to revisit earlier years. So the better option may be to produce interim claims at each year end, so long as they are accurate.
- Plant and machinery procured under a contract entered into before 3 March 2021 is excluded. But how do you define a contract? With the proliferation of less traditional procurement arrangements such as framework agreements with call-offs, many are taking legal advice on where the line should be drawn.
- Any assets provided for leasing are excluded – apart from ‘background plant and machinery’ within a building. In plain English this is services and fittings that are integral to a building so that it can be let by a landlord. But not all “plant” is “background plant”, like for example office furniture.
- Tangible fixed assets are easier to analyse, but software is an entirely different matter. How do you define a contract date when there is no specific contract for a project? How do you define spend on software when all you have are salaries for staff who are focused on writing code, providing training and designing processes all at the same time?
Help is available
All of the above probably sounds very complicated, but specialist help is always on hand. Consider taking advice upfront when investments are being scoped out and contracts drawn up, but also during the implementation/ construction phase when retention of documents is key as is getting the categorisation of assets right in each period before filing your tax returns.
That advice will also come in handy when looking to mitigate the risk of future challenge. Whilst the generosity of the regime is clear for all, the scope for HMRC to probe and recoup cash which has been overclaimed - in a similar way to the National Minimum Wage and Coronavirus Job Retention Scheme programmes - is just as clear.
And more often than not the effort and cost of getting specialist help will be more than outweighed by the cash benefit on the table.