The super capital allowance – will it always be right to claim?

08 March 2021

Whilst the “super allowance” of 130% enhanced tax relief announced in the 2021 Budget might seem attractive, claiming it will not always be a good plan, according to Agricultural & Rural Business Partner Joe Spencer.

The new relief , which is only available to corporate businesses, becomes available from 1st April, and gives an uplift to the amount which can be claimed, so a piece of plant costing, say, £100,000 is treated as if it had cost £130,000 and the tax relief at 19% will be £24,700 instead of £19,000. This will be good for cash flow, but there is a sting in the tail.

The 130% allowance expires in April 2023 at exactly the same point as the corporation tax rate goes up to 25%, and when a “super allowance” asset is sold before that date, the proceeds don’t go back into the machinery pool, but are treated as if the monies received were 30% greater. This means that if the plant were traded in before April 2023 for say, £80,000, the tax payable would be £80,000 x 130% x 19% = £19,760 – so the tax saved will always be limited to 24.7% (19% x 130%) of the depreciation suffered on that particular asset.

Even aside from the balancing charge issue, timing of capital purchases and sales will be absolutely critical over the next few years for smaller companies. There will be a marginal rate of 27% for companies with profits between the small company and mainstream tax limits, (£50,000-£250,000) so it will be important to avoid keeping asset sales outside that band if at all possible –using the above example, if the sale transaction fell into the marginal rate, the tax relief would have been given at 24.7% but the clawback would fall into a 27% band. Similarly, although the enhanced loss reliefs also announced in the Budget could generate repayments of tax previously  suffered at 19% it may be better to carry the enhanced losses forward to reduce tax in later years at 25% or 27%. Finally, the existing 100% annual investment allowance on investment of up to £1,000,000  is also only guaranteed until December 2021, so if it then reverts to £200,000 the options for managing optimum CT exposure will become slightly more difficult after that date.

Joe Spencer concluded;

“Taking all these factors together, planning machinery transactions for best tax effect over the next few years seems likely to become far more challenging than it has been and detailed professional advice will be more important than ever”.

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