Extension of super-deduction to leased background plant
Proposed Finance Bill amendment extends the super-deduction and SR allowance provisions to leased background plant or machinery.
Proposed Finance Bill amendment extends the super-deduction and SR allowance provisions
A Finance Bill amendment (Amendment 2) has been tabled which extends the clause 9 super-deduction/SR allowance provisions. If this government amendment is passed leased background plant or machinery will now qualify for the enhanced deductions. This change will be welcomed by landlords.
The 130 percent super-deduction and 50 percent SR allowance are both first year allowances (FYA). If any of the general exclusions at s46 CAA 2001 apply, FYA are not available. General Exclusion 6 covers plant or machinery provided for leasing. Formerly, there was a carve-out from General Exclusion 6 allowing environmentally-friendly or energy-saving plant or machinery to qualify for FYA under s45A or s45H CAA 2001 provided it was leased under an excluded lease of background plant and machinery as defined in s70R CAA 2001. This carve-out was repealed - along with s45A and s45H themselves - in 2019. When the super-deduction was announced in March 2021 it was expected that a similar carve-out provision might be reintroduced, however the initial published legislation did not include this. The Finance Bill amendment will rectify this.
To qualify for super-deduction/SR allowance, a landlord would need to incur capital expenditure which meets the other super-deduction /SR allowance tests. Then s70R CAA 2001 would need to apply. This is the provision designed to ensure that certain kinds of plant or machinery leased with a building do not give rise to a long funding lease (in a nutshell: the landlord retains entitlement to capital allowances if the plant is background):
- The overall lease of land and buildings must contain a ‘derived’ lease of plant or machinery; and
- The derived lease must be an excluded lease of ‘background’ plant or machinery.
The outcome in these circumstances is that the leasing of the building will not prevent the lessor claiming super-deduction/SR allowance on the background plant. In fact the available relief is more likely to be the 50 percent SR allowance given that most items of background plant or machinery are also ‘integral features’ (see s33A CAA 2001), and therefore the base case - without the FB 2021 provisions – is that they would have qualified for the 6 percent special rate (s104A(1)(b) CAA 2001). As a result, the 130 percent super-deduction will not apply but the 50 percent SR allowance should apply.
‘Background’ plant and machinery is defined in s70R CAA 2001 as plant and machinery:
- Leased together with land and buildings; and
- Of a type reasonably expected to be found in buildings in general in order to enhance their functionality.
Using powers given by s70T CAA 2001, the Treasury has issued secondary legislation (SI 2007/303) which lists: (i) examples of the kinds of assets which may be regarded as background plant or machinery; (ii) items which are deemed to be background; and (iii) items which are deemed not to be background. HMRC manuals at BLM 21325-21345 explain the significance and interaction of these lists. For example, if an item appears on list (i) (and not on list (iii)) it should be accepted by HMRC. Items which do not appear on any of the lists may still be argued by the taxpayer to be background based on a supportable interpretation of s70R.