You could be forgiven for thinking that Rishi Sunak’s much publicised ‘Super deduction’ is going to herald the dawn of a new era. An extra bit of tax relief to encourage businesses large and small to invest and drive growth in the UK economy post Covid.
Cynics have suggested it’s simply a stunt to make sure people don’t delay investment until 2023 when they would get 25% tax relief if the corporation tax rate is increased.
The first thing to point out is it is only available for companies, so partnerships won’t get it.
After all we already have Annual Investment Allowances (AIA), certainly to 31 December 2021, of up to £1 million. As you might expect we haven’t had any farm clients who have troubled tis limit in recent years, so what will the super deduction offer?
Unlike AIA the new super deduction is not capped, so you get 130% relief on expenditure, effectively 24.7% tax relief, on all investment in plant! This might not make much difference to you, but if you are an Ineos or EasyJet, or even Arla or First Milk the cashflow advantage of the extra 112% deduction compared with the 18% writing down allowance available after the AIA has been exhausted is significant!
There is also the increased allowance for integral fixtures of 50% compared with 8% normally.
For the majority of our farming clients that trade as partnerships / sole traders AIA will be the only option. For companies there will be a choice, Super deduction, or AIA. For most plant it will be attractive to claim the super deduction, for integral fixtures such as water and lighting systems utilising AIA is more beneficial than the super deduction, as 100% rather than 50% relief can be claimed.
Obviously, any tax relief claimed now simply accelerates the tax saving and gives rise to higher tax payments on future profits, as less writing down allowance will be available. It also goes without saying that you can only claim tax relief if you have a tax liability to relieve, i.e. profits subject to tax.
Whilst all of this is good for companies, it does raise the issue of what will happen to AIA’s on 1st January 2022. After all if the super deduction is available to companies will it drop back to £200,000? If that is the case would it be wise to carry out any significant expenditure in 2021?
Whatever you think of the super deduction it probably raises more questions than answers, so if you have any queries about it contact your usual Dodd & Co contact.
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