Who is likely to be affected
Companies subject to corporation tax that invest in plant and machinery from April 1, 2021.
General description of the measure
This measure will temporarily introduce increased relief for plant and machinery expenses. For eligible expenses incurred from April 1, 2021 to March 31, 2023 inclusive, companies can claim during the investment period:
- a super-deduction providing rebates of 130% on most new investments in plant and machinery which normally give entitlement to depreciation allowances at the main rate of 18%
- a 50% deduction for the first year on most new investments in plant and machinery which normally qualify for special deductions of 6% for depreciation
The measure also temporarily changes the rules regarding expenses incurred for plant and machinery used in part in a closing trade in the oil and gas sector.
This measure aims to stimulate business investment. It does this by increasing the incentive to invest in plant and machinery by offering higher relief rates than were previously available.
Context of the measure
Capital asset deductions allow businesses to deduct the costs of tangible capital assets, such as plant or machinery, from their taxable income. They replace commercial depreciation, which is not a qualifying tax deduction.
The first year allowances allow increased relief rates for certain investments in plant and machinery, provided that the claims are made during the period in which the expenditure is incurred. The super-deduction is a subsidized allowance for the first year providing an allowance in excess of the cost of the asset.
The measure will take effect with regard to eligible expenditure from 1 April 2021 and will exclude expenditure incurred on contracts concluded before the budget date of 3 March 2021.
Part 2 of the Capital Allocations Act 2001 (CAA 2001) sets out the current Plant and Machinery Allowance Act.
The eligible expenses for the first year are currently contained in Chapter 4, Part 2, CAA 2001 and the allowances for these expenses set out in Article 52, Chapter 5, Part 2 CAA 2001.
General exclusions from first year allowances can be found in Article 46.
Chapter 5 contains provisions on pooling, disposal events and disposal values.
Chapter 17 contains anti-avoidance provisions that apply to first year allowances.
Legislation will be introduced in the 2021 finance bill to modify part 2 CAA 2001 in order to introduce the super-deduction, a reinforced temporary allowance of 130% the first year for prime rate assets and a 50% allowance the first. year for special rate assets.
Certain expenses will be excluded. The general exclusions in section 46 will apply. In addition, there will be exclusions for second-hand and second-hand assets and expenses on contracts entered into before March 3, 2021, even if the expenses are incurred after April 1, 2021. Assets fully utilized within the framework of a closing trade will be excluded from the super-deduction, as they already have a 100% allocation, assets partially used in a closing trade temporarily entitling them to a 100% allocation in the first year. Equipment and machinery expenses incurred under a hire-purchase or similar contract must meet additional conditions to be eligible for the super-deduction and special rate relief.
The rate of the super-deduction must be distributed if an accounting period overlaps April 1, 2023. The rate must be distributed on the basis of days prior to April 1, 2023 over the total number of days in the accounting period.
Changes will be made to Chapter 5 to introduce new disposal rules that will apply to assets that have been claimed for these allowances. Disposal receipts should be treated as balancing charges (taxable profits), rather than being pooled. The calculation includes rules that treat only part of the disposal receipt as a balancing charge, if part of the initial expense is claimed by these temporary allowances, or part is claimed by other depreciation.
In addition, for assets that have been claimed as super-deduction, the disposal value for capital deduction purposes should take the disposal receipt and apply a factor of 1.3, except where the disposals occur during the period. accounting periods overlapping April 1, 2023, resulting in a factor less than 1.3. This rule does not apply to the 50% first year allowance for special rate expenses.
An anti-avoidance provision applies to netting arrangements that are contrived, abnormal, or devoid of a genuine business purpose and existing Chapter 17 rules apply, including the exclusion of related party transactions from first year allowances. .
Summary of impacts
Chessboard impact (million pounds sterling)
|2020 to 2021||2021 to 2022||2022 to 2023||2023 to 2024||2024 to 2025||2025 to 2026|
These figures are presented in Table 2.1 of the 2021 budget and have been certified by the Office for Budget Responsibility. More details can be found in the policy costs document released with Budget 2021.
This measure will have a positive impact on business investment for the period it applies. It will do so by lowering the tax-adjusted cost of capital for millions of businesses (large and small) investing in qualifying plant and machine assets.
Impact on individuals, households and families
There is no impact on individuals because this measure only concerns companies. This measure should not affect the formation, stability or breakdown of the family.
Impacts on equality
It is not expected that there will be any impacts for people in groups sharing protected characteristics.
Impact on businesses, including civil society organizations
This measure is expected to have a significant impact on around 2.8 million businesses that incur eligible expenses for plant and machinery. One-time costs will include familiarization with the change and could include updating the software to account for temporary reliefs. The one-off cost for all businesses is estimated at £ 63million.
Ongoing costs could include taking into account the correct calculation when disposing of plant and machinery assets. The total ongoing administrative burden for companies to divest their assets is estimated at £ 16million per year. Costs could increase year on year as more companies divest themselves of these assets, but in the longer run these costs will be reduced to zero.
This could have a negative impact on the customer experience, as the change requires additional tax administration tasks to be performed when disposing of assets. In support of this, clear guidelines will be provided in the capital allocation manual.
This measure should not have any impact on civil society organizations.
The compliance cost estimates are presented in the following table:
Estimated one-time impact on administrative burden (million pounds sterling)
|One-off impact||(millions of pounds sterling)|
Estimated ongoing impact on administrative burden (£ millions)
|Continuous average annual impact||(millions of pounds sterling)|
|Net impact on annual administrative burden||+16|
Operational impact (millions of pounds sterling) (HMRC or other)
This measure will have an operational impact on HMRC, including staff resources and changes to IT systems and guidelines. Given that around 2.8 million businesses could claim the relief, the costs are estimated at £ 10.2million.
Other impacts have been taken into account and none have been identified.
Monitoring and evaluation
The measure will be monitored using the information collected in tax returns and through regular dialogue with companies and their representative bodies.
If you have any questions about this change, please contact HMRC by email: [email protected]