Is it a bird, is it a plane, no it’s super deduction!
In case you missed this when it was first announced as part of last year’s budget, there is still one year remaining of super-deduction, whereby companies can claim 130% of the cost of their capital expenditure investment when purchasing qualifying plant and machinery.
Super-Deduction in a Nutshell
With post-pandemic economic recovery in mind, super-deduction was introduced by the Government to stimulate business investment and in turn generate more corporate profits which can be taxed in 2023.
From 1 April 2021 until 31 March 2023, any investment made by a business in main rate plant and machinery qualifies for a 130% capital allowance deduction.
The relief can be used in the first year of the investment, and an additional 50% first-year allowance for special rate (long life) assets is also available.
The special rate or SR allowance, in addition to super-deduction provides a much higher tax deduction in the tax year of purchase than would normally be available.
How does Super-Deduction Work?
By taking a simple example of business investment on main rate equipment, we can examine how the 130% first year relief works.
If a business spends £100,000 on main rate equipment, they can make a corporate tax deduction of £130,000 from their taxable profits. This deduction of £130,00 saves the business up to 19% of the amount, which would be £24,700, as this is the amount of corporation tax saved by qualifying for super-deduction.
Outside of the current two-year super-deduction period, these investments would normally only qualify for 18% plant and machinery capital allowances.
SR Allowance for special rate assets
Much like super-deduction, the SR allowance works in a similar way.
If a business spends £1m on assets which do not qualify for the main pool or that have an expected life in excess of 25 years, the SR allowance provides a tax deduction of £500,00 against corporate tax profits in the first year. This equates to 19% of £500,000, or a £95,000 tax bill saving.
What about Annual Investment Allowance?
In addition to Super-deduction and SR Allowance, the Government also extended the £1m Annual Investment Allowance (AIA), until 31 March 2023.
With a 100% tax relief rate, AIA allows a business to deduct the full value of an investment from its taxable profits for financial expenditure on up to £1m of qualifying plant and machinery.
With this in mind, it is more logical to allocate the AIA against the first £1m of special rate assets because 100% tax relief is available as opposed to just a 50% deduction.
Assets which qualify for Super-Deduction and SR Allowance
A wide range of assets are eligible for super-deduction, and most assets which would be used in the normal course of business should qualify. In simple terms the following assets are likely to be eligible:
- Computer equipment and servers
- Office chairs and desks
- Tractors, lorries, vans
- Ladders, drills, cranes
- Electric vehicle charge points
- Refrigeration units
Assets which are eligible for SR allowance includes new plant and machinery that qualify for the 6% special rate pool, including integral features in a building and assets with a life of over twenty-five years. This is likely to include the following:
- Solar panels
- Foundry equipment
- Water pipes within a building
- An electrical system within a building
There are some exclusions to be noted, for example cars are excluded (while commercial vehicles/vans should be permitted), used plant and machinery are excluded, and there are complex leasing exclusions.
Finally, those looking to take advantage of super-deduction should note that it is only available to incorporated companies, who have qualifying expenditures. Sole traders, partnerships and LLPs are not eligible.
Further advice on Corporation Tax Planning
Making the most of corporate tax relief can be complex. As can be seen with super-deduction, SR allowance and AIA, the Government frequently adjusts rates or offers short term periods of additional relief.
At Kingston Burrowes our team maintain a constant awareness and understanding of the changing rules and regulations. With this specialist knowledge and experience, we can ensure that our clients take full advantage of the tax opportunities and reliefs available to them.