How does the super-deduction work?

In Budget 2021 the chancellor announced a new capital allowance super-deduction which is intended to spur business investment and aid post-pandemic economic recovery.

For two years from 1 April 2021 to 31 March 2023, companies’ buying qualifying plant and machinery will be able to claim a 130% capital allowance deduction, providing 24.7p (£1 x 130% x 19%) off company tax bills for every £1 spent. So a £1 qualifying asset will effectively cost a profit-making company 75.3p.

Tip 1. If you dispose of an asset that you claimed a super-deduction on, some of the relief could be clawed back depending on the disposal proceeds.

Tip 2. Ensure you have a record keeping system to keep track of the assets purchased on an individual basis.

What assets qualify?

The kind of assets that qualify for the super-deduction include, but are not limited to, machinery, computer equipment, office furniture and vans. If you want to check whether an asset will qualify, please contact us.

Tip. Certain assets are excluded including company cars and second-hand assets.

Assets on HP. There are additional conditions in the legislation relating to assets purchased using hire-purchase type arrangements. But they should still qualify for the super-deduction as long as you are making periodic payments to acquire the asset and there is an expectation that you will eventually end up owning the asset.

Is it really worth it?

As well as the super-deduction, Budget 2021 announced an increase in corporation tax (CT) from 19% to 25% in April 2023. This means that if your company has a tax liability of £100,000 for 31 March 2021, it will have a tax liability of £131,579 for 31 March 2024 -an increase of over 30%. This increase in CT means any benefits from the super-deduction could be reversed, especially if your company is investing less than £1m.

Example. Your company decides to invest in £100,000 of new equipment in April 2021 to take advantage of the new super-deduction. This results in a tax saving of £24,700. If the company had delayed the purchase of the new equipment to April 2024, the tax deduction would be £100,000 x 25% = £25,000. So there’s no real benefit to the super-deduction.

Tip 1. Our example assumes that the Annual Investment Allowance (AIA), which allows a 100% tax deduction for qualifying plant and machinery up to £1m, will still be in place in April 2024. As we don’t know if the AIA will still be in place in in two years’ time, there is a risk in delaying investment plans.

Tip 2. If you’re purchasing assets worth over the £1m AIA threshold, consider bringing the spend forward to take advantage of the super-deduction as the AIA is unlikely to be available on these assets.

Tip 3. Base the decision to buy assets on plans for your company to become more profitable and productive; then assess which tax year this should be in.

Your company can claim a 24.7p tax deduction for every £1 spent on qualifying assets which includes machinery, computer equipment and vans but not cars or second-hand assets. But when CT increases to 25%, you may be able to claim a 25p tax deduction for every £1 spent so don’t base your spending decision just on the availability of the super-deduction.