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Super Deduction and Capital Allowances

  • For expenditure incurred from 1 April 2021 until 31 March 2023, companies can claim 130% capital allowances on qualifying plant and machinery purchases
  • Under the super-deduction, for every pound a company invests, corporation tax is cut by 25p
  • The super-deduction was introduced in the 2021 budget in order to make the UK capital allowances regime more competitive

 

RECENT CHANGES TO THE CAPITAL ALLOWANCES REGIME

As a result of the measures announced in the 2021 Budget, businesses now benefit from four significant capital allowance measures

  • The super-deduction, which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023
  • 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023
  • Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold until 31 March 2023
  • Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026

 

WHY IS THE GOVERNMENT INTRODUCING THE SUPER DEDUCTION?

  • Since the Covid-19 pandemic, existing low levels of business investment have fallen even further
  • Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008
  • Making capital allowances more generous works to stimulate business investment. 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

 

WHAT ARE CAPITAL ALLOWANCES

Capital allowances let taxpayers 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.

In translating accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation, and then instead deduct capital allowances. For example, a corporation tax paying company with accounting profits of £1,000, depreciation expense of £200 and total capital allowance claims of £300 would make the following adjustments:

  • Add £200 (depreciation expense) to £1,000 (accounting profits) = £1,200
  • Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits)
  • Apply the appropriate tax rate, e.g., corporation tax at 19%: £900 x 19% = £171 tax due

 

The two main types of capital allowances are: 

  • Writing Down Allowances (WDAs) for plant & machinery – covering most capital equipment used in a trade
  • Structures and Buildings Allowances (SBA) – covering the construction and renovation of non-residential structures and buildings

The 130% super-deduction and 50% first-year allowance are generous, brand new capital allowances for investments in plant and machinery assets. Both will allow investing companies to lower their corporation tax bills

 

What is plant and machinery?

Most tangible capital assets used in the course of business are considered plant and machinery for the purposes of claiming capital allowances.

The kinds of assets which may qualify for either the super-deduction or the 50% FYA include, but are not limited to:

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

 

 

Examples of the super-deduction in practice:

 

Example one

  • A company incurring £1m of qualifying expenditure decides to claim the super-deduction
  • Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits
  • Deducting £1.3m from taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill

 

Example two

The below example illustrates the difference between the previous capital allowances regime and the super deduction (in year 1):

 

Previous system

 A company spends £10m on qualifying assets

  • Deducts £1m using the AIA in year 1, leaving £9m
  • Deducts £1.62m using WDAs at 18%
  • Deductions therefore total £2.62m – and a tax saving of 19% x £2.62m = £497,800

 

With super-deduction

The same company spends £10m (there is no cap) on

qualifying assets

  • Deducts £13m using the super deduction in year 1
  • Receives a tax saving of 19% x £13m = £2.47m

 

SUMMARY

Hopefully this article has provided a bit of insight into the super-deduction and capital allowances. If you need to discuss the super deduction or capital allowances in general, please call the office on 01926 851516.

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