Super deduction – how does it work and how to maximise its use

Super deduction was announced in the Budget 2021 and for qualifying main rate plant and machinery investments, it offers 130% first-year relief until 31st March 2023.

This is welcome news for companies looking to invest as they move forward. Here we explain exactly what super deductions mean for businesses and how to maximise its use.

What is super deduction?

Super-deduction and 50% first-year allowance are generous capital allowances for investments in plant and machinery assets. Both these brand-new allowances will allow investing companies to lower their corporation tax bills, providing a much higher tax deduction than would normally occur.

Coming into effect on 1 April 2021 and applicable until 31 March 2023, companies who invest in new plant and machinery assets that qualify can claim:

  • 130% super deduction capital allowance on qualifying plant and machinery investments
  • A 50% first-year allowance for qualifying special rates assets

For every £1 that companies invest, the super deduction allows these firms to reduce their tax bill by up to 25p.

The aim of super deduction

One of the aims of the super deduction regime is to encourage investment as the UK builds back following the COVID-19 pandemic.

The Government states that since the COVID-19 pandemic, business investment has fallen and weak investment in businesses in the UK has had a significant impact on the slowdown of productivity since 2008.

It hopes that the tax benefit of super deduction will encourage companies to invest in plant and machinery assets to increase productivity to aid their growth and encourage earlier investment in these businesses.

The Government states that introducing these measures will ensure that the Capital Allowance system in the UK is one of the most competitive in the world.  In fact, this change means that the net present value of the UKs plant and machinery allowances is the highest in all the OECD member counties.

Who can claim Super deduction?

These newly created first year’s allowances are only available to companies that are subject to corporation tax. Therefore, they do not apply to individuals, partnerships or LLP’s.

These allowances are in addition to the existing Annual Investment Allowance (AIA), which provides 100% relief for qualifying plant and machinery in the year of purchase.

You can often incorporate a partnership without immediate tax charges to then take advantage of the Super deduction. Please contact us if you wish further information on this.

How much can be invested to claim Super deduction?

Unlike the Annual Investment Allowance limit (£1m limit up to 31 December 2021) there is no limit of cap on the amount of capital investment that will qualify for super deductions of the Special Rate First Year Allowance (SR).

Super deduction and the new capital allowances regime

Four substantial capital allowances measures are available to business, following the announcements in Budget 2021:

  • Super deduction – providing first-year relief for companies on qualifying main rate plant and machinery investments at 130%, until 31 March 2023.
  • A 50% first-year allowance for special rate assets (including long life assets). Again, this is available for companies until 31 March 2023.
  • Annual Investment Allowance (AIA). This provides relief at 100% for plant and machinery investments. The threshold for this remains at £1m until 31 December 2021 (it will revert to £200k after this date).
  • New Enhanced Capital Allowances (ECA+) within the newly created Freeport zones. Here companies, individuals and partnerships will be able to benefit from increased levels of Structures & Buildings Allowance (SBA+) for investments. This will run until 30 September 2026.

What are capital allowances?

Capital allowances provide a mechanism for taxpayers to write off the cost of certain capital assets against their taxable income. Capital allowances can be used instead of accounting depreciation (not normally tax-deductible).

Eligible firms deduct capital allowances when reporting their taxable profits.

When computing accounting profits into taxable profits, a firm is usually required to add back depreciation. Where capital allowances apply, this can be deducted instead.

There are two main types of capital allowances

  • Writing Down Allowances (WDAs) for plant & machinery, which covers most capital equipment used in a business
  • Structures and Buildings Allowances (SBA). This covers the construction and renovation of non-residential buildings and structures

Super deduction qualifying plant and machinery

Whilst not all businesses investments will qualify, most tangible capital assets that are used for business are plant and machinery for the purposes of capital allowance claims. The Government does not publish an exhaustive list of plant and machinery assets.

Those assets eligible for super deduction includes all new plant and machinery, which would ordinarily qualify for the 18% main pool rate, or the 100% WDA under AIA.

Special Rate allowance includes new plant and machinery which qualifies for special rate pool. This includes long-life assets and integral features in a building.

The types of assets which may qualify for either the super deduction or the 50% First Year Allowance can include the following (this is not an exhaustive list):

  • Computer equipment
  • Electric vehicle charge points
  • Cranes, Drills, Ladders
  • Office furniture
  • Solar panels
  • Tractors, lorries, vans (but not company cars)
  • Compressors
  • Foundry equipment
  • Refrigeration units

 

How much tax relief can be claimed?

The table below summaries the effective relief against first-year costs for an eligible company:

Class of AssetCapital allowance claim typeType of assetCapital allowance rateEffective relief in year one
Main Plant and MachinerySuper deductionNew130%24.7%
Annual Investment AllowanceAll100%19%
Main PoolSecond hand18%3.42%
Special RateAnnual Investment AllowanceAll100%19%
Special Deduction RateNew50%9.5%
PoolSecond hand6%1.14%

How does Super deduction apply to companies with losses?

If a deduction cannot be created that can be set against profits, a loss may be created which can be carried forward. This applies to all capital allowances. Losses can also be carried back for three years, using the recently announced temporary three-year loss rules.

As was announced in Budget 2021, corporation tax is to increase to 25% from April 2023. This adds to a complex set of conditions for businesses to consider future cashflow, profits, losses and capital expenditure to ensure that capital allowances are planned and accounted for in the most tax-efficient way.

How Alexander & Co can assist

Our team of corporate tax advisors are on hand to help companies navigate the complex world of capital allowances and corporation tax as part of our comprehensive services for companies.

We can advise on the best route forward, based on your own circumstances and advise on business structuring and the tax implications of investment. Please contact us today by completing the form below, call our office on 0161 832 4841 or email info@alexander.co.uk

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