How ‘Super’ is the Super-deduction?

Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. By reducing the amount of income subject to tax, you can reduce your corporation tax bill.

Until 1st April 2021, the highest rate of capital allowances available was 100%. This was given on qualifying assets which fulfilled the criteria attached to the Annual Investment Allowance (AIA) and was subject to an annual limit which has fluctuated in recent years.

For those assets which did not qualify, Writing Down Allowances (WDA) may be available at a rate of 18% for main pool items or 6% for special rate items.

Since 1st April 2021, these rates have been enhanced and companies investing in qualifying new plant and machinery assets between 1 April 2021 and 31 March 2023 will be able to claim:

-          130% super-deduction capital allowance on qualifying plant and machinery investments

-          50% first-year allowance for qualifying special rate assets

This blog will look at the reasons behind this change, it’s practical implication and key considerations for the small business owner.

Why have the rates been enhanced?

Since 2008, weak business investment in the UK has resulted in a slowdown of productivity growth. Investment was discouraged due to the uncompetitive capital allowance regime in place, whose net present value ranked just 30th in the Organisation for Economic Co-operation and Development group of countries.

The Covid Crisis has served to make this productivity gap even more pertinent and it is now a priority for the UK government to stimulate investment and drive economic growth as we try to recover from the global impacts of the crisis.

What does this mean in reality?

For those companies with funds to invest, the super deduction could reduce the taxes they owe by up to 25%.

For some, it may even generate an inflow of cash as enhanced capital allowances may create tax losses which could be carried back up to 3 years, creating a corporation tax repayment.

(See our previous blog: Extension to Corporation Tax Carry Back Loss Relief.)

The reality is though that these advantages are only available to those who have spare cash to invest and for many following the pandemic this is just not the case.

It’s also worth remembering that in this case ‘what goes up must come down’ because enhanced capital allowances now could create a balancing charge on disposal of the asset, increasing corporation tax liabilities later.

What do I need to consider?

For companies who are planning an investment in plant and machinery in excess of £1m, timing is key.

Firstly, make sure your expenditure is incurred by 31st March 2023 to make your purchases eligible for the super deduction. It is also worth noting that purchases contracted before 3rd March 2021 are not eligible for the super deduction, even if delivery takes place after 1st April 2021.

In fact, if possible, it is preferable to purchase the items by the 31st of December 2021. This is because the current AIA of £1M can be used in conjunction with the super deduction maximising the tax savings available.

Consideration should also be given to the administration of these assets. They should be identified separately in your fixed asset register, ensuring future disposals can be dealt with correctly and efficiently.

If you think the super deduction could benefit your business and want to talk about it more with an accountant who can help, please get in touch.