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Is it a bird, is it a plane, is it normal capital allowances? No it’s super deductions!
If you’re planning on investing in new plant and machinery assets for your business you could save tax if you buy them before 31 March 2023 and take advantage of capital allowance super deductions.
In the March 2021 budget the government introduced capital allowance super deductions as a way to encourage businesses to invest in plant and machinery assets. It was part of a number of measures to encourage business growth after the Covid-19 pandemic. Extra tax relief is available on qualifying assets purchased from 1 April 2021 to 31 March 2023.
Before we get to the super deductions, let’s look at how capital allowances usually work.
Normally when a business buys assets, such as tools, equipment, machinery or vehicles, the cost of the asset can be claimed in the tax return using capital allowances.
Assets live in pools and the portion of the asset value that can be claimed in the tax return each year depends on which pool. The majority of assets live in the main rate pool which allows 18% to be claimed each year. However some assets, like cars, have pools at a lower rate e.g. the Special Rate pool only allows 6% of the value to be claimed each year.
18% or 6% per year doesn’t sound that great, but the majority of businesses can actually claim the whole value of the asset in year one. This is done through the annual investment allowance (or first year allowances for certain assets). It applies to most new assets except cars, and gives 100% of the value in the year of purchase. If it’s not claimed in that first year (or not entirely claimed) the rest of the value reverts to the standard 18% or 6% per year.
Capital allowance rates and rules can be changed and are a way for the government to encourage particular activities e.g. favourable rates on electric cars, unfavourable rates on high emission cars. In the case of the super deductions, it’s an incentive to encourage investment and growth.
The super deductions give 130% first year capital allowances on most new main rate pool plant and machinery investments. You are able to claim more than the actual cost of the asset.
So instead of the usual 100% for annual investment allowance / first year allowance or 18% for standard writing down allowance, you can claim 130% of the value in the first year.
For special rate assets where only 6% of the value can normally be claimed each year, the super deductions allow 50% of the value to be claimed in the first year.
Sadly the super deductions don’t apply to types of business, only to limited companies.
Capital allowances can be claimed by sole traders, partnerships, furnished holiday lets and limited companies. However only limited companies can claim the super deductions.
These are typically moveable plant and machinery type assets including computer equipment, commercial vehicles such as tractors, lorries and vans, tools and machinery such as ladders, drills, cranes, office equipment such as desks and chairs.
Integral features in a building such as the heating and lighting systems may not qualify for the 130% but could qualify for the 50%. This also applies to long life assets (with a useful life of at least 25 years), thermal insulation added to buildings and solar panels.
There are a number of exclusions, but some of the main ones include:
Second hand assets – it must be a new, unused asset.
Assets given as a gift.
Cars (but commercial vehicles and vans are allowed).
Plant and machinery purchased for leasing, i.e. bought in order to lease out to other people. The exception to this is background plant and machinery within a building.
Buildings and structures
Additionally if you are ceasing your business, you can’t claim the super deductions in your final accounting period.
The super deductions are claimed in the same way as the standard capital allowances on the company corporation tax return.
Assets where super deductions have been claimed will need different treatment on sale or disposal.
If you’re disposing of the asset in an accounting period that ends before 1 April 2023 (so still during the super deductions period) then it’s more straightforward. You claimed 130% of the asset value, so you give back 130% of the disposal value (as a balancing charge).
If you’re disposing of an asset in an accounting period that begins after 1 April 2023 (so falls entirely outside the super deductions period) then the disposal value stays as it is, no adjustment required.
If you dispose of an asset that starts in the super deduction period but ends after, then it gets tricker as you end up with a hybrid approach. The disposal value is effectively pro-rated based on the amount of time inside and outside the super deduction period. The super deduction part of the value is at 130% and the rest at 100%.
There are more complexities if you only claimed super deductions on part of the asset value. There are also differences in how the disposal is dealt with in relation to the rest of your existing assets.
This may well be one for your accountant to grapple with. However, in terms of what you would need to know as a business owner, it saves tax to dispose of the super deduction assets outside of the super deduction period and particularly to wait until a business financial year that begins after 1 April 2023.
If you aren’t ready to buy new assets right now, but are worried about missing out on the super deductions savings, then don’t worry, all is not lost.
Corporation tax rates are increasing from April 23 to a rate between 19% and 25% (depending on profit levels) for businesses with profits over £50,000. Claiming normal capital allowances with a 25% tax rate gives similar tax savings to claiming 130% at a 19% tax rate.
If the asset cost £1,000 then under 130% super deductions you can claim £1,300 which saves tax of £247 at 19%.
If you claim capital allowances on an asset costing £1,000 with a tax rate of 25% then you save £250 tax. This might all be in year one if you can claim annual investment allowance, or more spread out if you have to claim writing down allowance.
So if you have profits over £250,000 and know that you’re going to be at the 25% tax rate, you don’t necessarily need to rush. Waiting until the corporation tax rate goes up will give you similar tax savings on your capital allowances.
However for those businesses with profits over £50,000 but under £250,000 who will end up on a hybrid rate between 19% and 25%, it may be more advantageous to go for the super deductions depending on your profit and therefore the tax rate applied.
Bounce Back Loan abuse is in the news…the Insolvency Service is to be given new powers to crackdown on Bounce Back Loan abuse by enabling them to investigate directors of companies that have been dissolved.
This effectively closes a legal loophole. At present, the Insolvency Service, on behalf of the Business Secretary, only has the ability to investigate directors of live companies or those entering a form of insolvency.
These new powers have been driven, in part, by concerns that businesses are abusing the dissolution process to fraudulently avoid the repayment of loans under Bounce Back Loan scheme.
The powers at the disposal of the Insolvency Service are:
Another abuse that these powers are set to address is phoenixing. Here, the directors dissolve one company and set up a virtually identical business after the dissolution, often leaving employees, customers, suppliers and HMRC out of pocket.
The intention is for these measures to be retrospective. The Insolvency Service will be investigating companies that have already been dissolved to see if this this was appropriate or to avoid the repayment of Bounce Back Loans.
The Bounce Back Loan Scheme was a vital element of government support during the COVID-19 pandemic. It provided a quick injection of cash for businesses struggling to make ends meet.
However, it was always more of a band aid than a panacea. Businesses fail despite the best-efforts of the directors. In many cases, closing and dissolving the company is the correct course of action.
These powers are looking to target the small element who applied for a Bounce Back Loan with no intention to repay it.
Under the existing rules, directors of three companies have been banned for between eight and nine years where there had been misrepresentation in the application or the misuse of the funds.
You will find our previous article regarding the bounce back loan scheme by clicking here.
The Treasury has issued more guidance on The Recovery Loan Scheme. However, many questions remain unanswered.
The Recovery Loan Scheme is designed to ensure businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing COVID-19 loan schemes close.
Interestingly, “the finance can be used for any legitimate business purpose, including growth and investment.”
The scheme is due to launch on 6th April and is open until 31st December, although the close date is subject to review.
The loans will be available through a network of accredited lenders. However, at this stage, it is not clear who the lenders will be.
The government will guarantee 80% of the finance to the lender with the expectation that this will provide confidence to lend to businesses.
There will be two types of finance:
The term period is up to six years for loans and asset finance facilities and up to three years for overdrafts and invoice finance facilities.
No personal guarantees can be taken on facilities of up to £250,000, and in no circumstances can the principal private residence of the borrower be taken as security.
The eligibility criteria for the Recovery Loan Scheme are that your business:
A definition of “collective insolvency proceedings” will be issued in due course.
Businesses that have funding under the existing COVID-19 loan schemes will be eligible to the Recovery Loan Scheme if they meet all other eligibility criteria.
Only a few business sectors cannot apply:
However, there are crucial questions that still need to be answered, primarily what will the interest rate be and precisely what security demands can lenders make?
The Recovery Loan Scheme launches as banks are about to start collecting the first repayments from the Bounce Back and Coronavirus Business Interruption Loan schemes in June.
Banks are privately indicating that 40-50% of the loans issued will not be paid either due to affordability or fraud.
Given this backdrop, the level of enthusiasm for The Recovery Loan Scheme amongst the traditional High Street banks remains to be seen. However, this may provide an opportunity for alternative lenders to deliver a greater proportion of the overall funding.
We will be publishing updates on The Recovery Loan Scheme over the course of the next month as we receive more clarity on these issues.
The Chancellor, Rishi Sunak, unveiled the 2021 UK Budget in parliament today and there were twelve key takeaways:
Employees will continue to receive 80% of their current salary capped at £2,500 for hours not worked. However, the employer will need to make a 10% contribution in July and a 20% contribution in August and September.
See our blog on this topic here – https://cooperfaure.designmindshost.com/covid-19-business-support-job-retention-scheme-extended-by-a-month-and-more/
The grant will be worth 80% of three months’ average trading profits covering the February to April period. As before, it will be paid as a single amount and will be capped at £7,500 in total. All other eligibility criteria will remain the same as for the third grant, so there remains no support for those who were remunerated by dividends. The grant can be claimed from late April.
There will be a fifth and final grant covering the May to September period. The value of the grant will be determined by a turnover test. Individuals whose turnover has fallen by 30% or more will continue to receive the full grant, 80% of three months’ average trading profits capped at £7,500. Individuals whose turnover has fallen by less than 30% will receive a 30% grant, capped at £2,850. The final grant can be claimed from late July.
See our latest blog on this topic here – https://cooperfaure.designmindshost.com/covid-19-the-government-has-announced-a-welcome-second-grant-under-the-self-employment-income-support-scheme-but-key-groups-to-the-revival-of-the-economy-are-still-left-with-nothing/
The temporary increase in the residential Nil Rate Band to £500,000 in England and Northern Ireland has been extended until 30th June 2021. From 1st July 2021, the Nil Rate Band will reduce to £250,000 until 30th September 2021 before returning to original level of £125,000 on 1st October 2021.
The government will underwrite lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million. The scheme will be open to all businesses, including those who have already received support under the Bounce Back Loan Scheme or CBILS.
See our latest blog on this topic here – https://cooperfaure.designmindshost.com/the-recovery-loan-scheme/
This measure applies to England and offers grants of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses.
The temporary reduced rate to 5% VAT for goods and services supplied by the tourism and hospitality sector will continue until 30th September 2021. A 12.5% rate will apply for the subsequent six months until 31st March 2022 with the rate then returning to 20%.
There will be 100% business rates relief from 1st April 2021 to 30th June 2021 followed by 66% business rates relief for the period from 1st July 2021 to 31st March 2022. The relief will be capped at £2 million per business for properties that were required to be closed on 5th January 2021, or £105,000 per business for other eligible properties.
This will be available for both incorporated and unincorporated businesses. Relief for up to £2 million of losses in each of 2020-21 and 2021-22 years can be carried back against profits in the preceding three years to generate a Corporation Tax or Income Tax refund.
See our latest blog on this topic here – https://cooperfaure.designmindshost.com/extended-loss-carry-back-relief-limited-companies/
In a reversal of the previous strategy, Corporation Tax will increase from April 2023 to 25% on profits over £250,000. The rate for small profits of up to £50,000 will remain at 19%. There will be an as yet undefined tapered increase in the rate on profits between £50,001 and £250,000.
Despite there being little evidence of widespread abuse, for accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times their total PAYE and NICs liability. At the same time, there will be another R&D consultation to cover whether the schemes should be amended to remain internationally competitive and keep the UK at the cutting edge of innovation.
See our latest blog on this topic here – https://cooperfaure.designmindshost.com/research-and-development-tax-relief-testimonial/
Whilst the preceding policy announcements had been widely revealed before the 2021 UK Budget, the Chancellor held one announcement back. From 1st April 2021 until 31st March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.
As ever, the Budget document runs to over one hundred pages covering a lot more than in the speech. For instance, the contactless payment card limit will increase to £100, and cumulative contactless payments up to £300. Banks are expected to implement the new limits during the year.
We will be reviewing the document to unearth other gems for our next newsletter over the weekend.
We will also be looking at how the changes to the Corporation Tax rate will impact the remuneration strategy between salaries and dividends. In April 2016, the personal tax treatment of dividends changed. This closed the gap on the overall tax paid between a salary and a dividend, but it still tilted in favour of a dividend.
At the time, the Corporation tax rate was 20%. From 2023, with the rate 5% higher, the overall tax basket may well tilt in favour of a salary.
Further information is available from gov.uk – https://www.gov.uk/government/topical-events/budget-2021
The original Job Retention Scheme was due to end at midnight on 31st October to be replaced by the Job Support Scheme. In a dramatic development, literally hours before the deadline, the scheme has been extended to cover the period of the new national lockdown to December.
In addition, the scheme is reverting to the position in August covering 80% of an employee’s current salary for hours not worked, up to a maximum of £2,500.
Flexible furloughing will continue to be allowed in addition to full-time furloughing. The employer will remain responsible for the National Insurance and pension contributions for hours not worked along with the full costs of hours worked.
Broadly, the scheme will continue to operate in the same manner as before. However, there are a couple of significant changes:
The Job Support Scheme has been postponed until the furlough scheme ends.
The government also announced that businesses required to close in England due to local or national restrictions will be eligible for the following to the following grants through their local authority:
Finally, the period for mortgage payment holidays was also due to end on 31st October. This has also been extended. Borrowers who have impacted by COVID-19 who are yet to have a mortgage payment holiday will be entitled to a six month holiday whilst those who have started will be able to top up to six months without this being recorded on their credit file.