What does Super Deduction mean in practice?
On 3 March 2021, the Chancellor announced a temporary change to tax relief which allows companies to claim enhanced capital allowances on qualifying plant and machinery assets.
But how will this work in practice?
Example 1:
A company purchases new equipment (a qualifying asset) on 30 June 2021 costing £5m.
Tax relief under the “old” rules | Tax relief under the super deduction | ||
Maximum AIA available | £1m | Super deduction claim (£5m@130%) | £6.5m |
Writing down allowances (£4m@18%) | £0.72m | ||
TOTAL Capital allowances in year 1 | £1.72m | TOTAL Capital allowances in year 1 | £6.5m |
Tax saving at 19% in year 1 | £0.33m | Tax saving at 19% in year 1 | £1.24m |
As a result of the super deduction, a company can save c£910,000 in corporation tax in the year of purchase in this example.
Example 2:
A company purchases new solar panels (a special rate asset) on 30 June 2021 costing £5m.
Tax relief under the “old” rules | Tax relief under the special rate allowance | ||
Maximum AIA available | £1m | Special Rate allowance (£5m@50%) | £2.5m |
Writing down allowances (£4m@6%) | £0.24m | Maximum AIA available | £1m |
TOTAL Capital allowances in year 1 | £1.24m | TOTAL Capital allowances in year 1 | £3.5m |
Tax saving at 19% in year 1 | £0.24m | Tax saving at 19% in year 1 | £0.67m |
As a result of the special rate allowance, a company can save c£430,000 in corporation tax in the year of purchase in this example.
In both the examples, where no FYA is claimed there would be capital allowances available in future years.
Super deduction and special rate allowance
For both the super deduction and special rate allowance it will be necessary to apportion the disposal proceeds between the part which qualified for the FYA and the part which did not.
Super deduction if asset disposed of in an accounting period ending before 1 April 2023 or beginning before 1 April 2023.
If an asset on which the super deduction was claimed is disposed of before 1 April 2023, special provisions will apply to determine the disposal value and consequent balancing charge. In order to calculate the taxable disposal value, the actual proceeds received (relating to the part of the asset for which the super deduction was claimed) must be multiplied by 1.3 (unless the accounting period straddles 1 April 2023, in which case the multiplying factor should be reduced accordingly based on the number of days pre/post 1 April 2023).
Anti-avoidance
Anti-avoidance legislation can counteract the effect of the FYA claimed where arrangements are entered into with the main purpose of claiming the FYA was to obtain a tax advantage.
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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