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Super-deduction on capital allowances – what you need to know

18-05-2021|Ultimate Finance

Our Head of Finance John Farquharson provides answers to some of the frequently asked questions around the Super-deduction capital allowance scheme.

As part of Rushi Sunak’s Budget announcement in April, the Government announced a super-deduction capital allowance scheme along with a raft of other measures to encourage investment in the economy. It’s designed to encourage eligible companies to invest quickly, raising demand for plant and machinery while also improving productivity and competitiveness of UK companies.

What does it mean?

Well, if your business is planning on acquiring any plant and machinery before March 2023, then there could be some tax advantage, and if your business acquires the assets through HP, then there could be some cashflow benefits too. At a high level, under the super-deduction, for every pound a company invests, your taxes can be cut by up to 25p.

What’s a capital allowance to begin with?

They let taxpaying companies write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax deductible. Businesses deduct capital allowances when computing their taxable profits.

What’s in scope?

All of the following must apply before the relief can be claimed, and it only applies to companies, so sole traders or any form of partnerships are excluded.

  1. The expenditure must be incurred between 1 April 2021 and March 2023.
  2. The expenditure must be on qualifying plant and machinery.
  3. The qualifying plant and machinery must be bought new, second hand assets do not qualify.
  4. The qualifying plant and machinery must be bought to be used in the business and not be held for leasing/rental to customers.

HMRC considers most tangible capital assets used in the course of a business to be plant and machinery for the purposes of claiming capital allowances and the super-deduction.

There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for the super-deduction 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 – but NOT cars.

How does it work?

Your company acquires an eligible asset for £10k and decides to claim the super-deduction. It can therefore deduct £13k (£10k @ 130%) in its tax return and save £2,470 in tax (£13k@19%) as opposed to £1,900 without the super-deduction, a saving of £570.

A word of warning, this allowance expires on 31 March 2023 and the basic rate of corporate tax is due to rise to 25% from April 2023. As a result, the timing of when you buy your plant is particularly important to optimise both tax savings and cashflow benefits. To make sure you get things right, we’d recommend you get advice from your tax adviser.

If you use HP to acquire the asset, then there’s cashflow advantages as the benefit from the super-deduction applies in Year 1, so you get the tax benefit without having paid out all the acquisition cost.

What if I buy a second-hand asset?

A second-hand asset will not qualify for the super-deduction tax relief of 130%, however it will potentially still qualify for the Annual Investment Allowance (AIA) which provides 100% relief for plant and machinery expenditure. The deadline for 100% AIA relief on expenditure up to £1 million has been extended until 31 December 2021.

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