A tale of two super deductions

29 Mar 2021

John Cullinane, Director of Public Policy at the Chartered Institute of Taxation, assesses the new super deduction.

We and others have long nagged governments to give taxpayers more certainty. This year the Chancellor did just that - with a full two years’ notice of a corporation tax rate hike from 19% to 25%. The delay also acknowledged the strong economic argument to allow the economy to recover before actually raising taxes.

Transparency has consequences. Companies know that income now will be taxed more lightly than income later, and expenses less generously relieved. This could, for example, make for interesting discussions between companies facing pensions deficits and pension trustees as to the timing of future tax deductible pensions contributions.

But it is capital spending that was most in the Treasury’s sights. Higher corporation tax is believed by some to pose risks for the volume of business investment. The Government is particularly keen on investment over the next couple of years, and faster write-off of investment for tax purposes was widely speculated on, as a sensible way of sugaring the pill of higher rates. But again, transparency causes a problem. Capital spending before April 2023 will largely be relieved at 19%, spending thereafter at 25 per cent. Might business investment actually be deferred? Necessity being the mother of invention, the 130 per cent ‘superdeduction’ was born - the 19 per cent rate x 130 per cent rounds to 25 per cent.

OK, capital allowances could have been disclaimed to get early capex relieved later, at higher rates. But this is hardly a fiscal incentive, and it would have been a poor Budget speech that urged business to invest - and then advised it to forgo available relief as the best deal on offer. Better announce a new idea that puts Britain at the top of the incentives league.

Actually, not totally new. A ‘super deduction’ already appears as part of the gallery of research and development incentives (see Research and Development tax relief for small and medium-sized enterprises - GOV.UK (www.gov.uk)). Too often, in the past, British has failed to capitalise on innovation in the field of research: it is good to see the Chancellor putting that tradition behind us.

Blog by John Cullinane, Director of Public Policy, Chartered Institute of Taxation. This article was first published in Practical Law Tax.