Did you know that the 130% capital allowances super-deduction comes to an end in March 2023?
The government has been generous since the Covid pandemic and has given limited companies the chance to claim a larger than normal capital allowance when purchasing new equipment as we noted in our blog about the 2021 Budget. This doesn’t happen often and many companies jumped at the chance to save a bit of extra tax, but unfortunately it is coming to an end on 31 March 2023.
The super deduction is an up-to 130% first year capital allowance for expenditure that has been incurred on the purchase of certain items of plant and machinery between 1 April 2021 and 31 March 2023. The aim of the super-deduction was to stimulate investment as the UK emerged from the pandemic. (Although a number of restrictions to making the claim exist, such as the purchase of cars, and second hand items).
Make sure that the expenditure is included before 31 March 2023
You really don’t want to be buying expensive equipment only to find out later that you have been too late to qualify! To meet the requirements the expenditure (meeting all the relevant conditions) must be ‘incurred’ on or before 31 March 2023.
What does this mean to me?
For the majority of purchases it is easy to work out when the expenditure has been incurred, especially if you have paid by cash or card. If delivery is made by 31 March 2023 and the money goes out of the bank before 31 July 2023 then your new asset will qualify for the super-deduction. But if you buy an asset under a finance agreement then how do you know when the expenditure has been incurred?
For capital allowances purposes, expenditure is incurred where there is an unconditional obligation to make payment, such as signing a contract, and when the payment is due within four months of the date of signing the contract. However when a company enters into a contract where a deposit payment is due on signing and a second payment is due on delivery of the asset this changes things. The deposit is unconditional and will be incurred on the signing of the contract. But the second payment is conditional on an external factor (being the delivery) and so would usually not be considered to be unconditional until delivery has taken place. If delivery occurs within four months of the contract date then all payments will qualify for the super-deduction and all is good!
Where you need to be careful
For larger items of equipment, it is often common for contracts to include stage payments. Any expenditure due for payment within four months of the payment becoming unconditional will be considered to have been incurred when the contract was signed.
However, where the payments’ due dates fall beyond four months of signing the contract then the expenditure is considered to be incurred on the date payment is due. And this is where some of the asset expenditure could fall outside the date for qualification for the 130% capital allowances super-deduction!
For example, consider a company that entered into a contract to acquire a piece of equipment on 1 October 2022 and agreed to pay a deposit of 20% on signing and then stage payments of 25% on 1 January 2023 and 20% on 1 April 2023 with a final payment of 35% due on delivery. The deposit and the 25% payment will be considered to have been incurred on 1 October 2022 and will qualify for super-deduction capital allowances. But the 20% payment incurred on 1 April 2023, which is after four months of signing the contract, and so will not qualify for the 130% capital allowance. The final payment on delivery is not unconditional and will be considered to be incurred at the point of delivery (when it becomes unconditional).
So how long have I got left to qualify for the 130% capital allowances super-deduction?
For your expenditure to qualify for the super-deduction, your payment must be unconditional by 31 March 2023. And must be due for payment within four months of becoming unconditional. And delivery must also be made prior to 31 March 2023 for a final payment on delivery to qualify too. So you don’t have long left to go!
What happens after the super-deduction comes to an end
You will still be able to get a tax deduction when you buy assets, just not at the same level. The spring budget last week included 100% capital allowances on qualifying expenditure on new plant and machinery from 1 April 2023 to 31 March 2026 which allows full expensing of certain expenditure in the year it is incurred.