Super-deduction and loss relief
The recent budget included several announcements that will affect most businesses in the UK and understandably a lot of the attention on this focused on the proposal to increase the rate of corporation tax to 25% from 2023.
There were however some measures in the budget which will be more welcomed, including the introduction of a new capital allowance ‘super-deduction’ and a temporary extension of the loss carry back rules.
For expenditure incurred between 1 April 2021 and 31 March 2023, companies can claim a super-deduction in the form of first year relief of 130% on qualifying plant and machinery additions.
For most small and medium sized businesses this type of expenditure would normally qualify for relief using the annual investment allowance (AIA) at 100%, so this measure will provide an additional 30% relief. However, there is a limit on how much can be claimed with AIA’s each year, but this will not be the case with the super-deduction, so for businesses making substantial investments in equipment, this measure will reduce the overall level of tax as well as accelerating when some of this relief is obtained.
Machinery, office furniture, vans, computer equipment will all qualify for the super deduction, however cars will not.
Whilst this will not be an issue for most companies that will use these new assets in their businesses for the foreseeable future, for any assets disposed of before 1 April 2023 on which the super-deduction was originally claimed, the proceeds will create a balancing charge, which will be multiplied by 1.3.
Normally, companies can either offset losses against profits made in the preceding year or they can carry the loss forward to offset against future profits. The position is similar for unincorporated businesses although sole traders and partners do also benefit from having more options as to what they can do with losses made in the first four years of trading.
As a means of helping businesses that have suffered during the pandemic, the Chancellor announced that the normal loss carry-back rules will be extended so that losses can be carried back to offset against profits made in the previous 3 years.
This extension will apply to companies and sole traders and partnerships although the rules will be slightly different for both.
For companies, trading losses made in accounting periods ending between 1 April 2020 and 31 March 2022 will be eligible to be carried back 3 years. For sole traders and partnerships, it will apply to losses made for accounting periods ending in the 2020/2021 and 2021/2022 tax years. In either case, the losses that can be carried back are capped at £2m per year.
Both of these measures’ present opportunities for businesses and if you would like to discuss either of them or of course how the corporation tax increase will affect your business, our team is here to help, so please contact your local Perrys office.