Super-deduction – will you qualify?

The new tax “super-deduction” policy announced by the chancellor Rishi Sunak in his Budget aims to encourage investment into the UK and boost its recovery from the pandemic.

But how will it work? And will you qualify for the allowance? The new form of relief will come into effect on April 1 and last until the end of March 2023.

During this period companies investing in qualifying new plant and machinery assets will be able to claim:

• a 130 per cent super-deduction capital allowance on qualifying plant and machinery investments
• a 50 per cent first-year allowance for qualifying special rate assets

The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.

The policy does not apply to sole traders or unincorporated businesses.

As a result of measures that he announced at the despatch box, businesses will now benefit from significant capital allowance measures:

• The super-deduction – which offers 130 per cent first-year relief on new qualifying main rate plant and machinery investments until March 31 2023 for companies
• The 50 per cent first-year allowance (FYA) for new special rate (including long life) assets until March 31 2023 for companies
• Annual Investment Allowance (AIA) providing 100 per cent relief for plant and machinery investments up to its highest ever £1m threshold, until December 31 2021

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.

The two main types of capital allowances are:

• Writing Down Allowances (WDAs) for plant and 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 super-deduction and first-year allowance will both allow investing companies to lower their corporation tax bills.

What is plant and machinery?

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

There is no exhaustive list of plant and machinery assets. The kinds of assets which may qualify for either the super-deduction or the 50 per cent FYA must be new and 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

Here is an example of the super-deduction in practice:

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 per cent of the initial investment) when computing its taxable profits.

Deducting £1.3m from taxable profits will save the company up to 19 per cent of that or £247,000 on its corporation tax bill.

The Treasury says that full technical guidance on the initiative will be published in due course.

• To discuss if you’re business may be eligible contact WNJ on 01772 430000