How super is the ‘super-deduction’ for the hospitality sector?

Natalie Miller
Hospitality and Leisure, COVID-19, Tax
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Since 1 April, companies have been able to take advantage of the temporary increase to capital allowances for corporate expenditure which was announced in the Spring Budget to encourage businesses to invest, thus boosting the economy. Given that the hospitality and leisure industry has been hard hit by the Covid-19 crisis, relief of £130 for every £100 spent sounded as good as the ‘super-deduction’ title implies, but businesses still need to think about the implications before either assuming their expenditure will qualify or committing to new expensive purchases.

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The soundbite is that trading companies can claim 130% tax relief for unlimited qualifying expenditure on plant & machinery, compared with the usual 18% capital allowances reduction. You could even claim a 50% allowance on integral features, which normally only get 6% relief. This is on top of the existing Annual Investment Allowance (AIA) which provides 100% relief for up to £1m of qualifying expenditure incurred before 31 December 2021.

If you’re creating or extending outdoor seating areas; adding moveable screens to separate customers or staff; or making the most of lockdown by upgrading your catering equipment or refurbishing your premises, this sounds very attractive.

Making the claims will reduce your profits and save on your next corporation tax bill. It may even create or increase a loss which, under the other big Budget announcement, can potentially be carried back for three years, and generate a corporation tax repayment. Remember that while either route will save you money, you won’t see the benefit until your next bill is due or your tax return goes in, so you need to be able to fund your purchases in the meantime,

However, there are several factors which can mean that either you can’t get the relief at all, or it may give you a tax saving initially but cost you more later.

To qualify at all, you must be trading via a company – so sole traders, partnerships or LLP structures aren’t eligible. The expenditure must be on new (not second-hand or used) equipment that is either qualifying plant and machinery of a special rate asset. If you buy equipment on hire purchase, there are special conditions to be satisfied.

You must incur the costs between 1 April 2021 and 31 March 2023. So, if your contract purchases were before then, perhaps to provide take-away services during lockdown, your expenses won’t qualify, even if you didn’t pay the money until after 1 April.

Even if you meet the conditions, it’s worth doing some ‘number crunching’ to see whether the relief is as valuable as you think. Comparing new reliefs of 130% or 50% with the usual rates of 18% or 6% sounds great but many businesses were already claiming 100% relief under AIA, so the advantage is less exciting. However, if you’re likely to need to incur substantial costs after 1 January 2022 when the AIA is scheduled to reduce to £200k, you’ll see a bigger advantage (provided you buy before 31 March 2022). 

If you tend to have a high turnover of capital assets and sell any asset before 1 April 2023, on which you claimed the super-deduction, a balancing charge will arise and this will be multiplied by a factor, up to 130% so that the extra relief on purchase is clawed back.

You should also bear in mind that the corporation tax rate is set to increase from the current rate of 19% to a potential rate of 25% from April 2023 for companies with profits over £250k. Under the super-deduction, you get a tax deduction for every pound you invest – which is what you’d get anyway if you delay spending until 2023 anyway!

In conclusion, this measure is intended to encourage companies to invest sooner rather than later to boost the economy now and increase their profitability later. However, it can also mean that your company pays extra tax on those increased profits.

As with any tax measure, you shouldn’t let the ‘tax tail wag the dog’! Don’t forget the commercial realities: Do you need it? Is It worth the money? Would buying it second-hand still cost less than new less the tax saving? 

It will be worth going through your options with your adviser.

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