My VIP Tax Team question of the week: Super Deduction and Pre-Trading Expenditure
My client is undertaking preparations to trade, but due to the scale of the operation will not commence trading until April 2023. A large amount of expenditure is being incurred now on main pool items of Plant and Machinery (P&M). Is this expenditure eligible for the Super-Deduction?

The super-deduction was introduced by s9 Finance Act 2021 allowing a 130% deduction for qualifying expenditure by companies. HMRC’s guidance is at CA23161.

This measure was designed to boost the economy by encouraging companies to invest in P&M and compensate for the increase in/reintroduction of the main rate of Corporation Tax rate from 1st April 2023 (25%). £100 of expenditure on qualifying items results in a £130 deduction against taxable profits (trading profits, UK property business profits or management expenses) – an effective relief of 24.7%.

To qualify for the super-deduction, expenditure must:

  • Be incurred on or after 1 April 2021 but before 1 April 2023,
  • Be incurred by a company within the charge to corporation tax,
  • Be expenditure on plant or machinery which is unused and not second-hand,
  • Not be within any of the general exclusions in s46(2) Capital Allowances Act 2001,
  • Not be special rate expenditure (there is a separate 50% ‘SR allowance’ for such expenditure), and
  • Not be expenditure on the provision of plant and machinery for use wholly or partly for the purposes of a ring fence trade.

The general exclusions within s46(2) CAA 2001 include being expenditure on a car, expenditure on P&M for leasing and expenditure in the period in which the qualifying activity is permanently discontinued.

When a company incurs capital expenditure before commencing to trade, the general rule applied by s12 CAA 2001 is that the expenditure is treated as being incurred on the date that the trade commences. Therefore, if the trade were to commence in April 2023, s12 would apply to treat the expenditure as being incurred in April 2023 – which is outside of the specified time period to qualify for the super-deduction.

However, for the purposes of determining whether expenditure is incurred on first-year qualifying expenditure (including the super-deduction – per amended s39 CAA 2001 via s9 FA 2021), s50 CAA 2001 states that the effect of s12 CAA 2001 is to be disregarded. This means that for the purposes of determining whether it’s first-year qualifying expenditure only, we revert back to the general rule in s5 CAA 2001. This states that expenditure is incurred as soon as there is an unconditional obligation to pay it – with exceptions for ‘milestone’ contracts, credit periods exceeding four months, and arrangements where the sole or main benefit is to accelerate unconditional obligations that do not accord with normal commercial usage.

Therefore, whilst the super-deduction cannot be claimed until the trade commences in April 2023, it would seem that the expenditure may still qualify for the super-deduction if the expenditure was incurred per s5 CAA 2001 between 1 April 2021 and 31 March 2023.

However, we then have to consider whether the rule in s11 FA 2021 applies – see CA23168. This ensures a reduced super deduction is given where expenditure is incurred in a period which straddles 1st April 2023. An accounting period ends when the trade commences – s10 CTA 2009.

Therefore, if the new accounting period starts in April 2023, does s11 FA 2021 mean that no super deduction is due at all? S50 CAA 2001 overrides the rule in s12 CAA 2001 for the purposes of establishing whether expenditure is on first-year qualifying expenditure. However, does s12 CAA still treat the expenditure as incurred when the qualifying business commences? The technical issues were considered by the Special Commissioners in Tower MCashback LLP1 & Anor v R & C Commrs (2007) SpC 619 which involved FYA expenditure that had to be incurred by 31st March 2004 to qualify. The Special Commissioners held that s50 overrode s12 and so treated the expenditure as incurred pre-31st March 2004 even if the business started after that date. However, that decision did not have to deal with the rule in s11 FA 2021.

The purpose of s11 FA 2021 appears to be to restrict the 130% allowance to periods when the CT rate of 19% applies to dissuade delaying investment until the CT rate increases in April 2023. Therefore, it would appear that s11 will deny a super-deduction if the business commences after 31st March 2023.As neither the legislation nor HMRC guidance covers this scenario, you could make a non-statutory clearance to HMRC if you have any doubts.

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