Changes needed to make sure the Super-Deduction adds up

The new 130% first-year capital allowance for qualifying plant and machinery assets, termed the 'Super-deduction' by Chancellor Rishi Sunak, is a bold and welcome step in supporting business investment.

For limited companies, it replaces a long line of different Annual Investment Allowances, that have allowed 100% allowances up to a fixed value. That value started at £50k in 2008, and since then has been fixed at £100k in 2010, then £25k in 2012, then £250k in 2013, then £500k in 2014, then £200k in 2016 and finally £1million in 2019, which lasted until December last year. [Correction added 5/3/21 12.45 pm: Actually the £1million was extended to end of 2021, running alongside the new Super-Deduction first-year allowance].

Suffice to say, there's been a lack of clear policy on what level works best in supporting business investment, and successive Chancellors have not been averse to letting one version finish and then making a big announcement about a new one at the next Budget (usually without mention of the previous one). Nor have trade associations minded being able to call for something they could be quite confident would be delivered in one form or another, so everyone is happy!

A fairly fundamental problem with this as a policy measure to boost investment is that it only works for firms with taxable profits to reduce. But at least, up to now, it's been available through some leases (those with transfer of ownership, including many Hire Purchase contracts subject to definitions set out by HMRC). That at least helps firms who don't have the cash to pay for their investment upfront.

Up to now this hasn't been a tax 'giveaway' in the long term, as it brings forward capital allowances that (usually) would have been available over the lifetime of the equipment anyway. The Super Deduction goes further than that, with a higher level of support that reduces the real cost of the investment.

Is there a catch however? It's unclear (to me, at least) but in the draft legislation, it states that Hire Purchase will only qualify if "the person to whom [the equipment] is bailed or hired is the person who incurs the expenditure". This really needs clarifying before the rules are confirmed. Under the section of law referred to in the rules - Section 67 of CAA 2001, for those interested - 'expenditure' is clearly the capital expenditure, not the rentals.

So is the Treasury suggesting that the lessee (being the party that hires the equipment ) also buys the equipment? Well that's tricky in leasing - unless it's it's a Sale and Leaseback, which up now hasn't been common. If that's what is planned, does that suggest lessees would need to borrow the money to pay for the equipment - a bridging loan of some sort? It all seems far too complicated, and I wonder if this is remotely the intention, or just something that needs clarifying.

Hopefully it will soon be confirmed that relevant leasing will qualify, as it has before. But that still leaves the problem that companies most needing support to invest - those without taxable profits - do not benefit.

The solution? Allow lessors to claim the allowances, on the basis (set out in law, in case of any concerns about abuse) that the full economic benefits of this will be passed through to the lessee through lower pricing. Add some Government risk sharing to the mix, and that creates a scheme for getting substantial investment support to precisely the businesses that need it - those without the profits to benefit directly from the Super-Deduction, and without the cash to pay upfront for new equipment. Now that really would be bold!


Please see for further analysis and reports on the leasing market, including latest survey of top UK lessees

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