The Spring 2021 budget introduced a new relief under the capital allowances regime called the “super-deduction”. The relief is available to companies that incur expenditure on qualifying new plant and machinery (P&M) between 1 April 2021, and 31 March 2023. It will allow them to claim a super deduction of 130% or 50% special rate first-year allowance for investing in P&M, leading to a reduction in their corporation tax bills. The main purpose of introducing super deduction capital allowance is to boost investment and productivity by encouraging firms to come forward and make investments in plant & machinery that will help enhance productivity and business growth.
- What is the Super deduction capital allowance?
- Who can claim a super deduction allowance?
- What type of assets will qualify for the super deduction?
- What is the expenditure limit on these new deductions?
- What happens on asset disposal?
- Working examples of Super deduction
- Relief companies can claim
What is the Super deduction capital allowance?
Companies that invest in qualifying new Plant & Machinery are eligible to claim -
- Super deduction first-year allowance @130% on for qualifying Plant & Machinery within the main pool, assets that attract 18% per annum.
- Special rate first-year allowance @50% on qualifying special rate assets would normally be relieved at 6% per annum.
Additionally, the annual investment allowance (AIA) of £1 million has been extended to December 31, 2021, and will revert to the previous £200k limit with effect from 1 January 2022. The super deduction can be claimed instead of the AIA, or assets that don’t qualify for super deduction can be allocated to AIA.
Who can claim a super deduction allowance?
- These new allowances are only available to companies that pay corporation tax.
- Individuals, partnerships, and LLPs are not eligible.
What type of assets will qualify for the super deduction?
Businesses making capital investments in new and unused assets qualify for the super deduction capital allowance. It doesn’t apply to second-hand equipment or assets. Similarly, for the expenditure to qualify for a special rate first-year allowance, the asset should be new or unused. Special rate expenditure includes:
- Integral features like electrical/lighting system, cold water system, lifts, and external solar shading.
- Solar panels
- Thermal insulation and long-life assets
Expenditure on assets such as cars and assets provided for leasing are excluded. Additionally, landlords have been excluded from the allowances through the exclusion of leased assets.
Also See: UK Tax Rates and Allowances for 2021/22
What is the expenditure limit on these new deductions?There is no expenditure limit specified for both the new deductions – either 130% super deduction or 50% special rate first-year allowances. The balance of super-deduction expenditure applied to the pool is zero when a super-deduction is claimed.
What happens on asset disposal?
When a business usually disposes of any fixed asset, the lower of the proceeds and the cost is usually deducted from the pool in which the asset was included. If a negative balance is obtained on the pool after making the deduction, the balance is liable for corporation tax.
When an asset on which super deduction was claimed is disposed of after 31 March 2023, the company will need to pay Corporation Tax on its sale value. If the company disposes of the asset before 31 March 2023, the special rules will apply, and the company will need to multiply the disposal proceeds with a factor of 1.3. The special rate assets are not affected by the special rules.
In cases where 50% special rate first-year deduction is claimed, 50% of the proceeds are taxed in the year of asset disposal, and the lower between the two - 50% of the proceeds or 50% of the cost is deducted from the special rate pool, subject to applying of usual rules on negative pools.
Thus, companies wanting to claim the super deductionallowance must maintain records accurately so that proceeds from future disposals can be correctly classified for tax purposes.
Working examples of Super deduction
Let’s consider an example of how companies can benefit from the allowance.
Example 1 – A company that has made an investment of £1million on qualifying assets in the main pool on 15 April 2021,decides to claim the super deduction allowance. Therefore, it candeduct £1.3million (130%* £1 million) while calculating its taxable profits. When the company deducts £1.3million from their taxable profits, it will benefit and save 19% of that on their corporation tax bill.
The expenditure will result in a total savings of £247,000, meaning the business saves 24.7p for every £1 invested under the super deduction.
|Previous system||The New system (With super deduction)|
|A company made an investment of £10m on qualifying assets.||A company made an investment of £10m on qualifying assets.|
|In the first year, the company deducts £1m with the use of Annual investment allowance (AIA), remaining with £9m.||In the first year, the company deducts £13m using a super deduction allowance.|
|Deducts another £1.62m with the use of Written down allowance @ 18%.||-|
|Making a total deduction of £2.62m and total tax savings will be £497,800 (£2.62*19% corporation tax) in the first year.||Tax saving will be £2.47m (£13m*19% corporation tax) in the first year.|
Relief companies can claim
After the announcement, companies are now eligible to benefit from four important capital allowance measures for expenditure between April 1, 2021,and March 31, 2023 –
- Super deduction and Main pool - Companies can claim 130% first-year relief on qualifying new plant and machinery, effective relief of 24.7%. For second hand P&M or assets that don’t qualify for Super deduction, the company can claim the main rate of 18%, effective relief of 3.42%.
- 50% first-year allowance and Special rate - Here, businesses will receive a 50% first-year allowance for special rate pool assets until March 2023, relieved at 9.5%. Expenditure that doesn’t qualify for the first-year allowance can be relieved at 6%, the effective rate of savings being 1.14%.
- Annual investment allowance (AIA) - Annual Investment Allowance (AIA) provides 100% tax relief on plant & machinery investments, up to the threshold of £1 million until December 31, 2021.
- Structure and Building Allowance (SBA) - Companies could benefit from the structures & buildings allowance (SBA) for expenditure on qualifying commercial structures and buildings.
Thus, this new incentive of super tax deduction from the UK government will benefit the investing businesses in lowering their corporation tax bills quite significantly. It would be better for the businesses to start planning for the investments in the qualifying assets from today as you can avail of this benefit till March 31, 2023.
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