In early March, Chancellor of the Exchequer Rishi Sunak announced the yearly budget, which included a range of measures to aid the UK’s economic recovery. One of these new measures was the super-deduction allowance.
What is the super-deduction allowance?
In summary, it offers companies 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023. Under the super-deduction, for every pound a company invests, their taxes are cut by up to 25p. This will mean that the UK’s capital allowance regime is more competitive internationally than the previous system. Likewise, it will lift the net value of our plant and machinery allowances in the Organisation for Economic Co-operation and Development (OECD) from 30th to 1st.
Why was it introduced?
The measure is designed to stimulate investment in productivity-enhancing capital by UK companies. Since the pandemic began last year, existing low levels of business investment have fallen, with an 11.6% reduction between Q3 2019 and Q3 2020. The super-deduction factsheet, published by HM Treasury earlier this year, explains that “weak business investment has played a significant role in the slowdown of productivity growth since 2008.” As a result, the government is making capital allowances more generous to stimulate business investment.
What counts as plant and machinery?
When it comes to claiming capital allowances, most tangible capital assets are considered plant and machinery. This includes:
- Tractors, lorries and vans (not cars)
- Computers, laptops and printers
- Ladders, drills and cranes
- Toilets and kitchen facilities
- Office chairs, desks and monitors
- Furniture and machinery
In addition there is a separate 50% first-year allowance for special rate assets. This includes:
- Integral features such as lifts, escalators, space and water heating systems, air-conditioning and air cooling systems (but not toilet and kitchen facilities), and electrical systems, including lighting systems.
- Fixtures such as fitted kitchens, bathroom suites, fire alarm and CCTV alarm systems.
- Solar panels, computer equipment and servers, vehicles such as tractors, lorries and vans, ladders, drills, cranes, office chairs and desks, refrigeration units, and more.
The super-deduction in practice
In their super-deduction summary document, HM Treasury provides an example of the super-deduction in practice. A company that incurs £1m of qualifying expenditure decides to claim the super-deduction. By spending £1m on qualifying investments, such as integral features and fixtures, the company concerned can deduct £1.3m (130% of the initial investment) from its taxable profits. Because £1.3m has been deducted from taxable profits, the company will save 19% of that figure (£247,000) on their corporation tax bill.
The super-deduction acts as an incentive for British businesses to invest in their company which will help to stimulate the British economy. Chancellor of the Exchequer Rishi Sunak explained that it is a “direct way to help businesses invest” and “drive growth in the economy” after a period of unprecedented economic turmoil.
Disposal of qualifying assets
It is important to note that when an asset on which a super-deduction was claimed is disposed of, the disposal receipts will be subject to a capital allowance balancing charge.
If the disposal occurs in a chargeable period that ends before 1 April 2023, the balancing charge is equal to the disposal value multiplied by the relevant factor of 1.3, so it is 130% of the expenditure disposed of, matching the initial super-deduction. If the chargeable period straddles 1 April 2023, the relevant factor is apportioned based on the number of days in the period before 1 April 2023. If the disposal occurs in a chargeable period that commences on or after 1 April 2023, the balancing charge is equal to the disposal value.
Why pay more tax than you need to?
Bulley Davey can undertake a full review of your business to determine the most tax-efficient structure for your circumstances. We have an in-depth understanding of the issues faced by businesses within today’s challenging tax environment, and our expert teams provide practical and direct advice to deliver solutions to meet your financial needs. Contact us today to discuss your requirements in more detail.