Spring Budget 2023 Series: Super Deduction Replacement
The Chancellor recently unveiled his ‘back to work’ tax measures in the Spring Budget, focused on restoring market confidence, easing some of the strain on businesses and the public, growing the economy and rejecting the “narrative of decline”.
“In the autumn we took difficult decisions to deliver stability and sound money. Today, we deliver the next part of our plan: a Budget for growth. Not just growth from emerging out of a downturn. But long-term, sustainable, healthy growth,” said Hunt.
Changes included lifting the cap on tax-free pension contributions, the 100% ‘full expensing’ tax relief and freezing fuel duty, however the corporation tax hike was held firm.
Read more from the budget announcements here.
Between 1st April 2021 – 31st March 2023, companies that invested in qualifying new plant and machinery assets were able to claim a 130% super-deduction capital allowance on plant and machinery investments, as well as a 50% first-year allowance for special rate assets.
The scheme was created to encourage firms to invest in productivity-enhancing machinery and assets to help them grow, and allowed companies to cut their tax bill by up to 25p for every £1 they invest, making it one of the world’s most competitive capital allowances regimes.
Calls were ignored to reverse the increase to corporation tax from 19% to 25% for businesses making more than 250,000, and instead Hunt announced a replacement to the Super-deduction scheme.
The scheme is to be replaced by a 100% full expensing tax relief for the next three years on qualifying new main rate plant and machinery investments, from April 2023 to the end of March 2026, to continue encouraging firms to invest. Full expensing allows companies to write off the cost of investment in one go.
“If the super deduction was allowed to end without a replacement, we would have fallen down the international league tables on tax competitiveness and damaged growth. As a Conservative, I could not allow that to happen,”said Hunt.
Any plant and machinery claimed must be new and unused, cannot be a car, given to the company as a gift or bought to lease to someone else.
Companies that invest in special rate assets will also benefit from a 50% first-year allowance during this period. This will cut tax for those businesses that want to invest, reducing their tax by up to 25p for every £1 they spend.
At the same time, all businesses also have access to the Annual Investment Allowance extension, which provides 100% first-year relief for plant and machinery investments up to £1 million.
In his speech, Jeremy Hunt said: “We will introduce a new policy of ‘full expensing’ for the next three years, with an intention to make it permanent as soon as we can responsibly do so.
That means that every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits.
It is a corporation tax cut worth an average of £9bn a year for every year it is in place. And its impact on our economy will be huge.
This decision makes us the only major European country with full expensing and gives us the joint most generous capital allowance regime of any advanced economy.”
The Office for Budget Responsibility has predicted that full expensing will boost business investment by 3.5% every year.
Martin Dye, director at Evelyn Partners, said: “The introduction of full 100% expensing for capital expenditure on qualifying plant and machinery will be very welcome by businesses, particularly when faced with the end of the current super deduction coinciding with the increase in corporation tax to 25% from 1 April 2023.
It is disappointing the relief is still only available to companies within the charge to tax and excludes individuals and partnerships with individuals. This does feel like a missed opportunity to better align the capital allowances regime with the government’s wider strategies, particularly as investment decisions being made now will impact the UK’s ability to meet its net zero targets by 2050.”
Paul Pritchard, senior managing director in FTI Consulting’s UK tax practice, said: “With the increase in corporation tax to 25%, full capital expensing effectively results in the same economic benefit as the super-deduction it replaces.
Whilst full capital expensing is a welcome measure to encourage businesses to invest in new IT, plant and machinery, it is unlikely to benefit loss making businesses.”
You can read more about the scheme in detail here.
Get More Business Blogs Like This
Like Us On Facebook | Follow Us On Twitter | Follow Us On LinkedIn