My VIP Tax Team question of the week: Super Deduction Balancing Charge
My client claimed super deduction expenditure on £500K piece of machinery during the APE 31 January 2022. While the asset is still operating, there has been a major downturn in profits generated from the it, therefore the company are considering selling it for £400K to inject some cash flow, but they are undecided whether this will take place in the current AP to 31 January 23 or in the subsequent period(s). What will the proceeds be if the machinery disposed on the following dates?


30 September 2022, 30 June 2023, 1 March 2024

The legislation for a super deduction disposal is provided under FA 2021 S12.

The person who incurred the super-deduction should be liable to any balancing charge in respect of any relevant event occurring S12(2).  A relevant event would include a sale of the machinery. CAA 2001 S61. The company is liable to the balancing charge.

You need to establish the relevant proportion subject to the super deduction disposal. S12(3)

The expenditure needs to split between the value claimed in respect of relevant super-deduction expenditure and the total expenditure to find the relevant proportion S12(4)(5).  In this situation, the whole amount of £400K would be the relevant proportion as the company originally claimed a super deduction on the entire £500K expenditure incurred in the relevant period.

The balancing charge calculation will depend on the timing of the disposal.   The relevant factor was originally reduced for disposals occurring after 1 April 2023 to reflect the increase in corporation tax rates from 19% to 25%. The principle being that relief was given at 24.7% (130% @ 19%) and so the clawback commensurate with the increased rate.

However, the 2022 budget announcement on the 23 September 2022 states that CT rates will remain at 19%. As a result, with the CT rate remaining at 19% the relevant factor in the calculation is will seemingly remain at 1.3. FA 2021 S12 (6) (7).

Therefore, if your client sells this asset at any time, the balancing charge calculation will be as follows:

£400K @ 1.3 £520K

 

If the Company had only claimed £300K as super deduction with £200K balance allocated to the main pool.  To find the relevant proportion, you divide the £300K/£500K giving you 60% with that used against the disposal value of £400K=£240K. This amount would be then carried down for the relevant factor calculation.  The 40% disposal balance would be allocated to the main pool. FA 2021 S12(3)(4)(5) (10)

You can also review HMRC’s guidance at CA23171 and Croner-i guidance at Croner-i 237-623.

The above is based on the announcement made by the Chancellor on 23rd September and so is subject to final legislation.

 

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David Lawson
08448922470

David started his career in HMRC.  During his time, he conducted tax investigations into OMB’s and certain avoidance structures.  He has gained experience of working in practice for a couple of years before joining Croner Taxwise December 2020.  He is a member of the ATT.

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