Potential pitfalls of super-deduction capital allowance explained

Agricultural businesses and companies looking to use the new super-deduction capital allowance need to carefully consider their investment options after the Budget introduced several significant tax changes, warns rural accountancy firm Old Mill

The Budget on 3 March introduced a lot of new legislation for farmers to take on board, with some of it looking incredibly attractive at first sight, but they should be taking a cautious approach, advises Catherine Vickery, associate director at Old Mill.

‘On the surface the new super-deduction – which allows an uncapped 130% capital allowance on plant and machinery – looks really exciting, but on closer inspection it’s smoke and mirrors,’ said Vickery.

Those who have a five-year investment plan of over £1m per annum - the Annual Investment Allowance (AIA) cap - should consider bringing it forward to take advantage of the super-deduction which runs from 1 April 2021 to 31 March 2023, as it has no spend cap. And anyone planning to buy something imminently should hold off until after 31 March 2021 to qualify.

However, the increase in corporation tax from 19% to 25% in April 2023 is going to be a shock for many companies, said Vickery. ‘It looks to be only 6p more in every £1, but it’s an increase of over 30%, so if you had a £100,000 tax liability, it will now be over £130,000. When you deduct that extra money from your profits, it’s that much less to pay off debt or draw out of the business.

‘The government wants businesses to be thriving and producing profits ready for this change – which highlights just how much corporation tax is going up.’

The increase in corporation tax means any benefits from the super-deduction could be nullified, especially for those investing less than £1m.

‘The 130% super deduction, combined with the current corporation tax of 19%, means that for every £100,000 you spend, you get £24,700 back in tax reductions,’ explained Vickery.

‘But if you wait two years and have to pay corporation tax at 25% with no super-deduction, a £100,000 expenditure would allow for a tax reduction equalling £25,000. So, everyone is getting excited but when you run the numbers, it’s much of a muchness, meaning anyone investing below £1m may be better to stick to their current investment plans.’ 

One caveat is that if the AIA reduces in the next two years, it could undo any benefits of waiting, which could mean missing out on any advantages of the super-deduction. ‘The decision to invest should be based on plans to become more profitable and productive; then assess which tax year this should be in,’ she added. ‘The chances are, in two years’ time the government will still be encouraging investment.’

Companies also need to bear in mind what assets are being purchased. ‘Some special rate assets, like solar installations, could cost well above the £1m AIA threshold. Here, there’s an argument to bring the spend forward as they get an annual writing down allowance of 8%,’ said Vickery. ‘The investment also qualifies for the AIA and is eligible for a 50% first-year allowance under the new super-deduction.’

Limited company status

Partnerships and sole traders may be wondering whether to become a limited company to take advantage of the super-deduction. ‘Caution is needed; don’t make a rush decision,’ said Vickery. ‘It all sounds very attractive but against a backdrop of 25% corporation tax in 2023, it will be really quite penal – and will put a lot of people off incorporating.’

Loss relief carry back

Partnerships and sole traders can still benefit from the new three-year loss relief carry back, she added. ‘Anyone who generates a loss through the 100% AIA can carry it back – so a heavy investment now, resulting in making a loss, could be carried back three years to reclaim the tax. This could free up significant amounts of cash to use in the business going forward.

‘Just remember not to look at the situation solely from a tax perspective – though it’s important, it’s not nearly as important as making the right investment decision to boost the profitability of your business.’

Financial experts Old Mill employ over 300 staff in four West Country locations with offices in Yeovil, Wells, Exeter and Melksham.

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