UK ‘Super’ Tax Deduction – Tax and Accounting Impact – Part 1


The UK government’s 2021 Finance Bill raised the corporate tax rate from 19% to 25%, effective April 2023.

The potential increase in the tax rate aims to compensate for the tax loss due to the Covid-19 crisis. However, the increase in the tax rate is softened with a radically new corporate tax law called “Great“deduction.

Corporations can write off 130% the cost of new capital assets purchased and put into service over a two-year period beginning in April 2021 and ending in March 2023, when the higher tax rate comes into effect. Fixed asset purchase contracts entered into after March 3, 2021, are also eligible.

The UK government believes that this generous capital allocation law will encourage further investment in equipment and machinery. UK Finance Minister Rishi Sunak called it “the biggest tax cut in modern history”. The estimated tax cost reduction of the ‘Super’ deduction is £ 25 billion ($ 34 billion).

There is no limit on eligible costs for 130% depreciation. However, assets purchased for leasing are not eligible and the government can recover the “Super” tax benefit from assets sold during a tax period in which the corporate tax rate is. 19% considering the transfer value as equivalent to 1.3 times the actual value. process. There are more “bells and whistles” in this “great” tax deduction law that is beyond the scope of this article.

So why is the UK ‘Super’ deduction so important?

This new corporate tax law is metaphorically a “carrot and a stick” designed to get businesses to invest and save tax in anticipation of a future tax rate hike. It also presents a unique complexity in financial reporting discussed in Part II.

The United Kingdom, like its former colony the United States, is no stranger to complex tax laws. For example, in 2015, the UK government enacted the Misappropriated Profits Tax (TPD) Act to claim rights to tax corporate profits attributable to certain business structures that the UK deemed abusive. . This time around, the UK government wants to promote capital investment, while increasing the corporate tax rate from 19% to 25% from April 2023.

Now the British have tried to “neutralize” the increase in the tax rate by setting the tax rate of the “Super” deduction with a multiplier of 1.3 to be as close as possible to the increase in the rate. 25% tax due in April 2023. Hence the “Super” deduction. the effective tax rate is around 25% (130% x 19% or 24.7% to be exact).

But is it really tax neutral?

The UK tax depreciation rules are unique, as is the ‘Super’ deduction. Depreciable assets are divided into two “depreciation groups” or classes. The “main” pool, for plant and machine assets, is depreciable at 18% per year (equivalent to a payback period of five to six years). The “special” pool, for most long-term assets and devices, is depreciable at 6% per annum (equivalent to a payback period of 16 to 17 years). The effective rate of the main pool is 3.42% (18% times 19%) and that of the special pool is 1.14% (6% times 19%).

There is also an Annual Investment Allowance (AIA) of full depreciation in the first year of 19% and capped at £ 1million ($ 1.36million) (a ‘100’ depreciation rule. % bonus ”allowed for all assets). The 2021 finance bill extended this AIA until the end of 2021.

With the “Super” deduction, the tax benefit of the first year is worth 24.7% cost (130% times 19%), which is better than 19% (100% bonus depreciation) and much better than 3.42% (main pool) or 1.14% (special pool).

For example, new machinery purchased on July 1, 2021 for £ 1million may generate a current tax benefit of £ 247,000 (£ 100 x 19% x 130%). Under the AIA provision, the tax benefit would be £ 190,000.

But there are more variables

Consider a business with current and expected short-term losses without the need for additional tax savings. If the company expects profits beyond 2023, it could choose to forgo the “Super” deduction instead of slower cost recovery or postpone capital investments. However, UK tax law allows losses to be carried forward into future tax years indefinitely (no expiration) until they are fully utilized. Therefore, a large current deduction that increases a current year business loss can, in theory, reduce profits in future years.

What about carrying back losses to claim reimbursement of taxes paid? The 2021 finance bill made an important change to the carry-over rule. Trading losses incurred during accounting periods ending between April 2020 and March 2021 may reduce the taxable income of the previous three years (instead of one) for a refund of tax paid in previous years, starting with the first year. This expanded deferral rule could be beneficial for businesses that were profitable and paid taxes in 2017, 2018 and 2019 before the Covid-19 outbreak.

Consider the following example to illustrate the impact on cash flow:

An asset with a cost of £ 1million is purchased and put into service on July 1, 2021. The asset has a six-year payback period (main pool), and the company is profitable every year and deposits financial statements over a calendar year. base, but its UK tax year ends in March / early April. Cash flow in the first two years (2021-2023) would have a tax cost of 19%, then increasing to 23.5% and 25%. In a “base case” scenario, the total expected cash tax savings from asset recovery are £ 225,700 if it is deducted within six years. The table below summarizes the cash tax effects of the “base” scenario.

If AIA is chosen, the first year tax benefit is £ 190,000 (19% x £ 1,000,000), and not enough to cover the increase in the tax rate (the time value of money and the cost of capital should be large enough to make up for this shortfall).

However, the “Super” deduction allows a tax saving of £ 247,000 (cost of £ 1,000,000 multiplied by 19% by 130%) entirely in the first year. The “Super” deduction is more advantageous than the regular deduction and AIA, almost offsetting the higher tax depreciation benefit if the capital investment was postponed to 2024 and beyond when the tax rate is. 25%.

Now, decision analysis will not always be clear if losses are expected in 2021 and 2022. The “time value” of money, inflation and a company’s cost of capital are additional considerations.

In all transparency, the British government’s conviction that companies react favorably to the partial or total write-off of fixed asset acquisitions is not new. Academic research is more favorable than unfavorable. For what it’s worth, Americans have two main provisions in US law (Tax Code Sections 179 and 168 (k) (depreciation bonus) allowing the full amortization of the acquisition cost.

To prepare Part II (Financial Report of the “Super” Deduction), we need to determine whether the “Super” Deduction is a “Special Tax Rate” or an increase in the tax base.

You might think this is a meaningless distinction, because the economy is the same: the UK government wants to boost capital investment, by corporation tax, by financing 25% of brand new fixed assets. How? ‘Or’ What? By introducing a “special” corporate tax rate for the depreciation of the first year comparable to a “bonus” depreciation on “steroids” (130% instead of 100% depreciated).

However, the “gatekeepers” of thought leadership in the accounting profession argue that the law “increases” the tax base of acquired assets relative to cash cost.

Although this is a meaningless distinction (the “super” deduction is a tax advantage for companies), it leads to a different accounting result discussed in Part II, super deduction financial reporting accounting in UK.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Yosef Barbut is a Tax Accounting Consultant who was previously an Associate in the BDO USA Country Office, and prior to that, a Tax Accounting Consultant in the PwC National Accounts Office.

Special recognition of Ingo Harre, a Germany-based chartered accountant and income tax accounting specialist and former senior tax director at BDO Germany, for his review and contribution.

Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].

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