The end of super deduction

Experts from Birketts, Roche, and Price Bailey gathered towards the end of 2022, at Norwich City Football Club to host their annual property seminar, diving deeper into the current challenges and opportunities facing the regional, national, and international property market.

Chaired by Price Bailey Tax Director, Steven Butcher, the well-attended session featured insights from Roche Partner, Graham Jones, and Building Surveyor, Paul Kelly, in addition to contributions from Birketts Associate and Senior Associate – Rebecca Bond and Steven Bell. Senior Managers, Charlotte Page and Jon Chambers from Price Bailey also shared current financial insights within the industry.

In our third part of our round-up series we will be summarising Jon Chambers’ thoughts on the impending end of the super-deduction in relation to landlords and tenants.

Only corporate taxpayers qualify for the super deduction. LLPs, as well as general partnership and individuals trading as property developers and property traders were not eligible for this scheme. We take a look at how corporates will be affected post 31 March 2023.

Does the qualifying plant and machinery need to be brand new?

Yes, the qualifying plant and machinery does need to be new. However, HMRC do allow this definition to include ‘used’ machinery that is nonetheless considered new i.e. it may have had limited use for testing, delivery or demonstration. Acquisitions from connected parties do not therefore qualify and are generally excluded from enhanced tax relief.

The main types of expenditure that qualify include plant and machinery that would generally qualify for capital allowances in the general pool: furniture, IT equipment and servers, CCTV, alarms, electric vehicle charging points; or the special rate pool.

Expenditure to be allocated to the special rate pool for commercial buildings, include:

Integral features e.g. lifts, water heating systems, air conditioning and electrical systems,
Thermal insulation of existing buildings used in a business,
External solar shading.

How much relief is offered?

As many businesses are now aware, the scheme offers first-year relief of 130% on general pool items and a 50% first-year deduction on qualifying special rate pool assets. Unlike the Annual Investment Allowance, there is no upper limit on expenditure.

What is the time-limit for claiming super deduction?

The time-frame for claiming super deduction runs from the 1 April 2021 to 31 March 2023. With limited time to plan for qualifying capital expenditure, it is necessary to consider the tax implications for companies whose accounting periods end after 31 March 2023 and that have bought relevant assets within the qualifying period.

Example | Purchase of super deduction assets in an accounting period spanning 1 April 2023:

The rate of super deduction looks at the number of days in the accounting period both before and after 1 April 2023, and apportions the 130% accordingly, giving a blended rate.

Company A carries out a “Cat B” fit-out in an office space it is renting, incurring expenditure of £300,000 in the period from 5 January 2023 to 30 April 2023. £240,000 of the work is certified before 31 March 2023 of which £175,000 qualifies for the super-deduction. Its accounting date ends on 31 December 2023.

90 days fall in the qualifying period to 31 March 2023. Therefore the blended rate becomes (90 / 365) x 30% plus 100% = 1.074%. In this case, Company A’s tax relief will be £175,000 x 1.074% = £187,950.

Example | Disposal of super deduction assets in an accounting period spanning 1 April 2023:

Disposing of assets that have previously qualified for super-deduction relief requires the company to calculate a balancing charge, which is added to its taxable profits. The proceeds are not deducted from the general plant & machinery pool as they would normally.

Company X has an accounting period ending 30 September 2023.

On 28 May 2023, it sells computer equipment on which a full super deduction claim had been made. The purchase price was £50,000 and Company X is selling the equipment for £10,000

The number of days in the accounting period before 1 April 2023 is 182 out of the total days in the accounting period of 365.

The relevant factor for calculating the balancing charge is arrived at by dividing 182 by 365, then multiplying the result by 0.3 plus 1 = 1.15

Company X multiplies this result by £10,000, which gives them a balancing charge of £11,500.

Example | When disposing of a special rate first year allowance (SR allowance) asset:

On 10 January 2022, Company Y purchased an air-conditioning system for £300,000 and claimed a 50% SR allowance of £150,000 in its year ending 30 September 2022.

On 14 August 2025, Company Y disposes of the system for £15,000.

The ‘relevant allowance expenditure’ is £300,000 and because the company claimed the SR allowance on the full cost, this means the ‘total relevant expenditure’ is also £300,000.

The ‘relevant allowance expenditure’ is divided by 2:

£300,000 / 2 = £150,000

This is then divided by the ‘total relevant expenditure’ to get the ‘relevant proportion’:

£150,000 / £300,000 = 0.5

The ‘relevant proportion’ of the disposal value is arrived at by multiplying this result by the disposal value:

0.5 x £15,000 = £7,500 balancing charge.

Because Company Y claimed the allowance for the full cost of the asset, the ‘relevant proportion’ of the disposal value is half. The other £7,500 proceeds are deducted from the special rate pool as normal.

Other key area that landlords should be aware of regarding super deduction?

Section 198 elections

Balancing charges can potentially be minimised by using a section 198 election. The election can fix nominal disposal values for the assets upon which the super-deduction and SR allowance have been claimed.

Landlords should be careful when analysing contributions to tenant fit-outs.

Due to the exclusion for leased assets, a landlord will not obtain super deduction relief on contributions made towards a tenant’s fit-out costs where the tenant has purchased assets that are not treated as “background plant and machinery”. Background plant and machinery is leased with land as part of a mixed lease, of a type that might reasonably be expected to be installed in various types of building and whose sole purpose is to make the building usable. Therefore assets such as office furniture would not qualify in this situation.

Record keeping

Due to the requirements the legislation places on taxpayers to calculate balancing charges on disposals of super deduction (or SR allowance) assets, it is crucial to maintain good quality records for each relevant asset.

If you have any questions regarding super deduction, you can contact Jon Chambers using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

For more insight, events and webinars, sign up to the Price Bailey mailing list…