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 offering 130% allowances on most investments in new plant and machinery that normally qualify for 18% main rate reduction allowances
- a 50% first year allowance on most investments in new plant and machinery which generally qualify for a special 6% reduction allowance rate
The measure also temporarily changes the rules for 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 cost allowances 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 an eligible tax deduction.
First-year allowances allow for increased rates of relief for certain investments in plant and machinery, provided claims are made during the period the expenses are incurred. The Super Deduction is an enhanced first-year deduction that provides a deduction in excess of the cost of the asset.
The measure will apply to eligible expenses from April 1, 2021 and will exclude expenses incurred for contracts entered into before the budget date of March 3, 2021.
Part 2 of the Capital Allowances Act 2001 (CAA 2001) sets out the current law on factory and machinery allowances.
Eligible first year expenses are currently contained in Chapter 4, Part 2, CAA 2001 and allowances for such expenses set out in Section 52, Chapter 5, Part 2 CAA 2001.
General exclusions to first-year allowances are included in s46.
Chapter 5 contains provisions on pooling, elimination events and elimination values.
Chapter 17 contains anti-avoidance provisions that apply to first-year allowances.
Legislation will be introduced in the Finance Bill 2021 to amend Part 2 CAA 2001 to introduce the super-deduction, an improved temporary deduction of 130% for prime rate assets and a 50% deduction for the first year for special rate assets.
Certain expenses will be excluded. General exclusions at s46 will apply. In addition, there will be exclusions for used and second-hand assets and expenses relating to contracts entered into before March 3, 2021, even if the expenses are incurred after April 1, 2021. Assets used entirely within the framework of a closing trade will be excluded from the super-deduction, as they already benefit from a 100% relief, assets used in part in a closing trade temporarily qualify for a 100% relief in the first year. Plant and machinery expenses incurred under a hire-purchase or similar contract must meet additional conditions to be eligible for the Super Deduction and Special Tariff Relief.
The rate of the super-deduction will have to be allocated if an accounting period overlaps April 1, 2023. The rate must be allocated according to the days before April 1, 2023 over the total number of days of the accounting period.
Amendments will be made to Chapter 5 to introduce new elimination rules that will apply to assets subject to these allowances. Divestiture proceeds should be treated as balancing charges (taxable profits), instead of being paid into pools. The calculation includes rules that only treat a portion of disposal revenue as a balancing charge, whether a portion of the initial expense is claimed by these temporary allowances, or a portion is claimed by other amortizations.
In addition, for assets that have been claimed under the superallowance, the disposal value for capital cost allowance purposes should take the disposal receipt and apply a factor of 1.3, except where disposals occur during accounting periods overlapping April 1, 2023, resulting in a lower factor greater 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 artificial, anomalous or devoid of a genuine commercial purpose and the existing rules in Chapter 17 apply, including the exclusion of related party transactions from the allocations of the first year.
Summary of impacts
Treasury impact (£million)
|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 costing paper released alongside the 2021 budget.
This measure will have a positive impact on business investment for the period it applies. It will do this by reducing the tax-adjusted cost of capital for millions of businesses (large and small) that invest in qualifying plant and machinery.
Impact on individuals, households and families
There is no impact on individuals since this measure only affects businesses. This measure should not affect the formation, stability or breakdown of the family.
It is not expected that there will be any impacts for people in groups that share protected characteristics.
Impact on businesses, including civil society organizations
This measure is expected to have a significant impact on approximately 2.8 million businesses that incur eligible plant and machinery expenditure. One-time costs will include familiarization with the change and may include updating software to accommodate temporary relief. The one-time cost to all businesses is estimated at £63 million.
Ongoing costs could include taking into account the correct calculation when disposing of plant and machinery assets. The total ongoing administrative burden for companies disposing of assets is estimated at £16 million per year. Costs could increase year on year as more companies divest these assets, but in the longer term these costs will be reduced to zero.
This measure could have a negative impact on the customer experience, as the change requires the execution of additional tax administrative tasks when disposing of the assets. In support, clear guidelines will be provided in the Capital Allowance Handbook.
This measure should have no impact on civil society organisations.
Compliance cost estimates are presented in the following table:
Estimated one-off impact on administrative burden (£million)
Estimated ongoing impact on administrative burden (£million)
|Ongoing average annual impact||(£million)|
|Net impact on annual administrative burden||+16|
Operational impact (£million) (HMRC or other)
This 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 apply for this relief, the costs are estimated at £10.2 million.
Other impacts were taken into account and none were identified.
Monitoring and evaluation
The measure will be monitored through information gathered from tax returns and through regular dialogue with companies and their representative bodies.
If you have any questions about this change, contact HMRC by email: [email protected]