When the Chancellor announced the Budget at the start of March, he referred to it as a three-point plan. That means the various policies fall into three categories- to support the country through what should hopefully be the final stages of the pandemic, to invest in the recovery and to strengthen the public finances.
A combination of grants and a replacement for the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) should support businesses in the short term, while a corporation tax hike will raise funds to pay for the unprecedented government spending since the pandemic began. But in today’s article, I’m going to focus on the economic recovery, and one measure in particular.
Business investment- which was slow to rebound after the 2008 financial crisis- fell again during lockdown. By the end of the third quarter of 2020, it was 11.6% lower than at the same point in the previous year. The Chancellor recognised that he needed to encourage businesses to reinvest some of their profits to boost productivity, which should have a knock-on effect on the growth of the UK economy. That’s why he came up with what he called the Super-Deduction scheme.
Here’s how it works. The Super-Deduction is a form of relief which allows you to claim 130% of what you invest in plant and machinery against your company’s taxable profits. For every pound you spend, you cut your taxes by 25p. So if you invest £100,000 between now and the end of March 2023, you’ll reduce your tax bill by £130,000.
The use of ‘plant and machinery’ suggests the Super-Deduction is only applicable to industrial companies, but that isn’t the case. A range of tangible assets used by most SMEs qualify, including office equipment such as computers, chairs and desks as well as vehicles and tools. SMEs can also take advantage of the tax break to become environmentally friendly, for example by installing solar panels or charging points for electric vehicles.
There are other measures included in the scheme too: a 50% first-year allowance for more specialist equipment that doesn’t qualify for the 130% rate; an increase in the annual investment allowance from £200,000 to £1 million until the end of 2021; and incentives for companies to use freeports where they can import goods without incurring tariffs.
While the Budget was generally SME friendly, the inevitable rise in corporation tax to 25% by April 2023 caused dismay. That said, only companies earning annual profits of more than £250,000 will pay the full 25%. The increase will be tapered up to that level and remain at 19% for those generating less than £50,000 per year.
Nonetheless, these allowances- incidentally the most generous of the 36 members of the Organisation for Economic Co-operation and Development (OECD)- should ease some of the burden over the next couple of years for those affected. They’re also welcome because the return on investment should have a positive long-term impact on any SME that takes advantage of them. So if uncertainty has been holding you back from updating your IT system or expanding your fleet, you now have an incentive to proceed.
Register with Swoop today so you’re all set up for when you’re ready to explore an asset purchase. We’ll be sure to keep you up to date on the scheme, providing access to new tools as they become available and helping you to discover the right finance option for your business.