What are Super Deductions? How can your business benefit?

Andy Gibbs ATT CTA is Group Technical Manager at TaxAssist Accountants, who is a qualified Chartered Tax Adviser (CTA) and holds the STEP Advanced Certificate in Trust and Estate Accounting. He has dealt with both tax compliance and tax advisory projects across a range of industry sectors. Here, he walks us through the Government’s super tax deductions and how your business can benefit from them.

In a bid to encourage capital expenditure and business growth, the Government announced the introduction of a new ‘Super Deduction’ tax relief when the Budget was delivered on 3th March 2021. This new ‘Super Deduction’ relief only applies to companies and is not available to sole traders or partnerships. 

The measure temporarily introduces increased reliefs for expenditure on certain items of plant and machinery. For qualifying capital expenditure incurred from 1st April 2021 up to 31st March 2023, companies can claim in the period of investment:  

• a super-deduction providing allowances of 130% on most new plant and machinery investments that would ordinarily qualify for 18% main rate writing down allowances. This will generate an effective reduction in tax of 24.70p for every £1 spent on capital expenditure, however some notable exceptions apply — more on this later
• a first-year allowance of 50% on most new plant and machinery investments that would ordinarily qualify for 6% special rate writing down allowances (items such as integral assets like hot and cold-water systems) . This will generate an effective reduction in tax of 9.5p for every £1 spent on capital expenditure

For the purposes of this article, we’ll concentrate on the 130% rate, as this will be more commonly seen than the 50% rate.

Why was the Super Deduction introduced?

The Government is always keen to promote economic growth and one way it can look to secure this is to encourage businesses to make capital expenditure.

To understand why the 130% deduction was introduced, we have to consider that the rate of tax companies pay is due to increase from the current 19% to 25% from April 2023. The Government will also introduce a new Small Profits Rate of 19% for companies with annual profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25%, reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.

Given this increase, the concern was that many companies could decide to put off making capital investments, because they stand to save more tax by waiting for the main corporation tax rate to increase to 25%. The Super Deduction helps prevent businesses from deciding to defer making investments. Roughly, the 19% corporation tax rate multiplied by 130% rounds to 25%.

When it comes to qualifying capital expenditure, businesses may alternatively write off 100% of their costs against their business profits by claiming the Annual Investment Allowance (AIA). However, the amount of AIA that a business can claim is limited. The previous limit was £200,000 but in January 2019, it was increased to £1,000,000 and this limit will apply until March 2023. For smaller businesses, the AIA limit is generous and means most qualifying expenditure can be relieved under the AIA. For larger businesses who have to claim at the 18% main capital allowances rate, the super deduction is more critical in encouraging them to keep investing.

What does this mean?

Consider the position of a company that prepares accounts to 31st March and is considering the timing of making a qualifying capital investment of £100,000.

It may be considering making the investment either in the 31st March 2022 accounting period, or holding off and making the investment in the year ending 31st March 2024. We assume the expenditure is qualifying and that the AIA is available for both year ends.

Accounts year end	31st March 2022	31st March 2022	31st March 2024
Type of allowance	Super Deduction	AIA	AIA
Workings	£100,000 X 130% X 19% = £24,700	£100,000 X 100% X 19% = £19,000	£100,000 X 100% X 25% = £25,000
Tax saved	£24,700	£19,000	£25,000

For the year end 31 March 2022, a saving of £5,700 can be made by claiming the Super Deduction rather than the AIA. There’s only a small advantage of £300 in terms of tax saved if the company delays making the investment to the year ended 31st March 2024.

Conditions

Unfortunately, the 130% Super Deduction is not available for sole traders and partnerships, and the expenditure will only qualify if incurred by a company.

Other conditions for claiming a super-deduction include:

•  it must be incurred on or after 1st April 2021 but before 1st April 2023
•  the plant or machinery must be unused and not second-hand
•  it is not excluded

Excluded items include:

• cars
• shares & investments
• residential property
• plant or machinery for leasing
• long-life asset expenditure

Where the asset is acquired in the period in which the company ceases, a claim may not be made. The above are some of the main restrictions which apply in respect of the Super Deduction 130% relief rate, but you should always seek professional advice before taking a decision.

Things to watch for

Although making use of the Super Deduction can lead to tax savings, it’s also worth noting that there are a few things which may mean the Super Deduction is less attractive than anticipated.

New special rules apply where a qualifying asset is disposed of, and the Super Deduction has previously been claimed. The rules require that you must account for the proceeds via what is known as a balancing charge, which adds to the companies’ taxable profits. If this occurs, this claw back could represent a significant sting in the tail and could negatively impact your cash flow if the asset is disposed of.

A ‘disposal event’ would occur when the asset is sold, where the asset ceases to exist or where the business ceases. In some cases, this may not be an immediate issue as the asset may last for several years.

The rules here can be complicated but are summarised below:

For a disposal in an accounting period ending before 1st April 2023

The proceeds received for the asset on disposal are multiplied by 130% and effectively add this value to the company’s profits, which would be taxable at 19%.

For a disposal in an accounting period which straddles 1st April 2023

The rules here are more complex as the proceeds received will again need to be multiplied but the factor will be less than 130%. The factor is based on the days in the accounting which arose before 1st April 2023.

For a disposal in an accounting period commencing on or after 1st April 2023

The Super Deduction relief is due to end on 31st March 2023. You won’t then need to adjust the proceeds with a multiplication factor. The proceeds will still give rise to a balancing charge, be added to the company profits, and be taxed at the new rate of 25%.

It’s also worth noting that companies with special rate expenditure (items such as integral assets like hot and cold-water systems) will only benefit from a 50% allowance. They will generally be better off allocating the AIA to special rate assets instead.

If your company has losses arising from capital allowances, it’s possible to now potentially carry these back three years or carry these forward.

Any investment decisions need to be based on your companies’ circumstances and, with the main rate of corporation tax set to increase to 25% from 2023, optimising capital allowance claims and loss claims is crucial.

Tax relief and cash flow needs must be balanced and this may require running some projections to put your business in the best possible position.

TaxAssist Accountants is the UK’s largest network providing tax advice and accountancy services specifically for sole traders, partnerships, limited companies and personal taxpayers. With more than 410 TaxAssist Accountants offices nationwide, the network provides accountancy services, tax returns, payroll, bookkeeping, tax savings and tax advice to 78,000 customers. Visit www.taxassist.co.uk for more information.

04/03/22: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.