How does the super deduction work?
In the run up to your accounting year end its important to consider how the Super Deduction Tax relief works and how this affects your business.
- Projected capital expenditure and how capital allowances/super deduction could apply including the nature of future expenditure that could potentially qualify.
- Contracts and procurement; for assets acquired through framework and MSA-style contracts.
- Disposals can result in a balancing charge clawback for assets subject to temporary first-year allowances. This will require additions to be tracked separately from those that will be disposed of from asset pools.
Disposing of assets that qualify for the super deduction or special rate allowance
Subject to some exclusions, the enhanced relief is given by way of a First-Year Allowance (“FYA”) at the relevant percentage for the asset type. The percentages are as follows:-
Percentage of FYA | Known as | What assets qualify | Examples of such asset |
130% | "Super deduction" | Assets that qualify for plant and machinery allowances, ordinarily at 18% | Computer equipment, vans, office equipment |
100% | Assets that qualify for plant and machinery allowances, used partly in a ring-fence business and partly in another qualifying business | Computer equipment or machinery used for extracting oil & gas that are used in a ring-fence business | |
50% | “Special rate allowance” | Assets that qualify for capital allowances at the lower rate of 6% (special rate assets) | Solar panels electrical and lighting systems, cold water systems, lifts |
*50% of the cost can be claimed as a First Year Allowance, with the remaining 50% of the cost attracting 6% Writing Down Allowances on a reducing balance basis.
The temporary measure has been designed to encourage capital investment in the UK.
What assets will not qualify for this tax relief?
Not all plant and machinery will qualify for this tax relief. The exclusions are set out in the following table:-
Plant or machinery | 130% super deduction | 100% ring-fence trade allowance | 50% special rate allowance |
Cars | X | X | X |
Long-life assets (> 25-year life when new) | X | X | |
Plant or machinery acquired for leasing | X | X | X |
Second-hand assets | X | X | X |
Assets purchased where there is a change in the nature or conduct of the trade or business and the main purpose is to benefit from this tax relief | X | X | X |
P&M used partly for a qualifying activity and partly for other purposes, or the re-use of assets previously used for long funding leasing, or gifted P&M | X | X | X |
Special rate expenditure | X | X | |
Main plant or machinery | X | ||
Plant or machinery intended wholly or partly for a ring-fence trade | X |
How does this new enhanced deduction interact with the existing Annual Investment Allowance?
The annual investment allowance (“AIA”) will remain at £1m for the period from 1 January 2021 – 31 December 2021. There is no limit to expenditure to which the FYA for the period from 1 April 2021 to 31 March 2023 may apply.
The new enhanced deduction is in addition to the existing AIA therefore companies may be eligible to claim both the AIA and the new FYA. This can create an attractive cash advantage for many companies who are planning on investing in plant and machinery however careful consideration must be given to what tax relief to claim.
Companies who are planning on investing in plant and machinery of more than £1m in the next few years should consider taking advantage of the super deduction by bringing expenditure forward and incur the costs on or before 31 March 2023.
When the corporation tax rate of 25% applies from 1 April 2023, the tax deduction for expenditure qualifying for capital allowances will also be 25p for every £1 invested, but without the benefit of a first year allowance or such a generous AIA, it will be obtained over time and not in one year.
How we can help
If you have any questions on the Super Deduction tax relief and how this impacts your business, please do not hesitate to get in touch by completing the short contact form below.
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