The super-deduction allowance

Under the super-deduction, for two years from 1 April 2021 any investments your business makes in plant and machinery will qualify for a 130% capital allowance deduction

The super-deduction allowance is the most attractive tax incentive for business investment ever offered by a British government. Your company can claim back 25p for every pound you invest in ‘qualifying’ machinery and equipment for two years from 1 April 2021. This equates to 130% of the total cost of certain capital assets. We explain below which assets qualify.

From Chancellor Rishi Sunak’s perspective, it’s a “direct way to help businesses invest” and “drive growth in the economy”.

What is the super deduction?

Why has the government introduced the super-deduction?

How does the new super-deduction work?

Is my business eligible for the super-deduction?

What does the government mean by ‘qualifying’ plant and machinery?

Can I claim super-deduction if I use asset finance?

I’ve already made an order but it hasn’t arrived yet – will this qualify?

What is the super-deduction?

For two years from 1 April 2021, any investments your business makes in plant and machinery will qualify for a 130% capital allowance deduction. 

You might also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.

The 130% super-deduction and 50% first-year allowance are brand new capital allowances for investments in plant and machinery assets. They could reduce your corporation tax bills until 2023.

We explain more about what constitutes ‘qualifying’ spending below.

Why has the government introduced the super-deduction?

In a nutshell, the super-deduction tax break is intended to spur business investment, boost the UK’s post-pandemic economic recovery and improve the country’s productivity levels over the next two years. 

This should in turn lead to more corporate profits for the government to tax in 2023.

Since the pandemic, previously low levels of business investment have fallen even further, “with a reduction of 11.6% between Q3 2019 and Q3 2020”, according to the Treasury’s super-deduction fact sheet. “Making capital allowances more generous works to stimulate business investment,” the Treasury explains. “As a result, these measures can promote economic growth and counter business cycles … The super-deduction will give companies a strong incentive to make additional investments, and to bring planned investments forward.”

How does the new super-deduction work? 

The new tax relief is being introduced for two years for expenditure from 1 April 2021 to 31 March 2023 – sadly it’s only a temporary measure.

How does it work? Let’s look at the 130% first-year relief on qualifying main rate plant and machinery investments made during this period. Here’s an example:

Let’s say your business spends £100,000 on equipment and you’re eligible to claim the super-deduction tax break on this expenditure (you can read below what constitutes ‘qualifying’ plant and machinery). 

When you calculate your taxable profits your corporate tax deduction will be £130,000 (i.e. 130% of your initial investment). Deducting £130,000 from your taxable profits will save your business up to 19% of that – 19% of £130,000 is £24,700. And that’s how much corporation tax you save if you qualify for super-deduction.

Bear in mind that this is a 130% deduction for investments that would normally qualify for 18% plant and machinery writing down allowances. And the first-year allowance of 50% on special rate pool expenditure would normally only attracts 6% writing down allowances.

From an accounting perspective, our advice for businesses looking to maximise your tax savings is to plan ahead. 

Is my business eligible for the super-deduction?

Your business is eligible if you spend money on any of the assets listed below between April 1, 2021 and March 31, 2023.

What does the government mean by ‘qualifying’ plant and machinery?

In other words, what equipment can I claim super-deduction against?

The kind of assets that qualify for either the super-deduction or the 50% first-year allowance include, but are not limited to:

  • Solar panels
  • Computer equipment and servers
  • Tractors, lorries, vans
  • Ladders, drills, cranes
  • Office chairs and desks
  • Electric vehicle charge points
  • Refrigeration units
  • Compressors
  • Foundry equipment.

Bear in mind that that certain expenditure is excluded, for example, the acquisition of company cars.

The government has promised to publish further guidance. 

Can I claim super-deduction if I use asset finance?

There is a lot of confusion over this question and we are awaiting confirmation from the Treasury. In the draft super-deduction legislation (published on 3 March 2021) plant and machinery investment incurred under “a hire purchase or similar contract” has to meet “additional conditions” to qualify for the super-deduction.

Most people have inferred that the 130 per cent tax break therefore excludes hire purchase or asset finance arrangements.

I’ve already made an order but it hasn’t arrived yet – will this qualify?

No, you need to have spent the money during the time period specified, i.e. between 1 April 2021 and 31 March 2023.

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