The new tax ‘Super Deduction’ and enhanced reliefs in Freeports.
The Chancellor has announced a new ‘Super Deduction’ which will cut companies’ tax bills by up to 25p for every pound they invest in plant and machinery. This is the first time capital allowances have been available at over 100 percent and would represent a substantial bonus for companies planning on investing in the UK. The introduction of eight English Freeports was also announced. These Freeports will provide a range of further investment incentives including reliefs from capital allowances, stamp duty land tax (SDLT) and employers’ NIC.
The ‘Super Deduction’
The Chancellor has introduced what he referred to as “the biggest business tax cut in modern British History”.
Companies investing in qualifying new plant and machinery between 1 April 2021 and 31 March 2023 will benefit from the tax ‘Super Deduction’. The relief is only available for corporation taxpayers, and contracts must be entered into after 3 March 2021 (similar to the restriction which applied on the introduction of the Structures and Buildings Allowance (SBA) at the 2018 Budget).
Under this new measure, expenditure invested by companies in assets qualifying for main pool capital allowances will receive a 130 percent first-year allowance (FYA). In addition, assets qualifying at the special rate (e.g. integral features and long-life assets) will benefit from a 50 percent first-year allowance.
For example, if a company were to invest £10 million in a piece of machinery in 2021 (from 1 April) this would equate to an immediate cash tax saving of £2.47 million. This compares to a first-year cash saving of circa £342,000 under the current regime, or, assuming a discount rate of 6 percent, a net present value (NPV) benefit of circa £675,000 over 30 years.
Similarly, for a company investing £10 million in a new office, where they might expect 20 percent of the total cost to qualify for main pool capital allowances and 20 percent to qualify for special rate pool capital allowances, and with the remaining spend qualifying for SBA, the first year cash benefit would be circa £718,000 under the new rules, compared to circa £125,000 under the current regime, and an NPV benefit of circa £198,000 over 30 years.
The FYAs introduced are subject to general exclusions; the one area of concern is whether property landlords will be affected by the exclusion for leased plant and machinery; clarification will be needed from HMRC on this specific point*.
The Introduction of Freeports
The Chancellor also announced the introduction of eight English Freeports at East Midlands Airport, Felixstowe, Humber, Liverpool City Region, Plymouth, Solent, Thames and Teesside.
Once the designated tax sites within these Freeports are confirmed, a 100 percent enhanced capital allowance will be available to companies investing in plant and machinery in the designated tax sites up to 30 September 2026.
Furthermore, there will be an increase in the SBA to 10 percent (usually 3 percent per annum for expenditure incurred after 1 April 2020) for expenditure incurred within these designated tax sites provided that the structure or building is brought into use on or before 30 September 2026.
To encourage investment in the new Freeport zones (once they have been designated), land purchased for a ‘qualifying use’ in these zones will be free of SDLT until 30 September 2026. HMRC will be able to monitor qualifying use for a control period of up to three years and withdraw the relief if the property ceases to be in qualifying use in this period. In addition, subject to Parliamentary approval, the Government intends to make an employer’s NIC relief available for eligible employees in all Freeport tax sites from April 2022, or when a tax site is designated if later. This would be available until at least April 2026 with the intention to extend for up to a further five years to April 2031, subject to a review of the relief.
For more information on Freeports see our earlier article.
The Annual Investment Allowance (AIA)
Last but not least and as previously announced, the temporary £1 million limit for the AIA will be extended to 31 December 2021; it will revert back to £200,000 on 1 January 2022. The AIA is an annual relief on plant or machinery expenditure and allows all qualifying expenditure up to the limit to be relieved in the chargeable period it is incurred.
This is a welcome confirmation on the AIA, especially to those outside of the ‘Super Deduction’ regime (e.g. income taxpayers and projects where the contract was signed prior to 3 March 2021) and will provide an accelerated deduction for qualifying expenditure.
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*Update 12 March 2021: Following publication of the Finance Bill we can now confirm that the FYA introduced are subject to the general exclusions at s46CAA2001 and HMRC have confirmed that property landlords are caught by the exclusion for leased plant or machinery.
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