Capital allowances super-deduction: your questions answered
Will your business need to upgrade its equipment or infrastructure in the near future? In place for a limited time only, the capital allowances ‘super deduction’ might be a very good reason to make your purchase sooner rather than later.
Here’s what you need to know about the super deduction, the wider capital allowances regime, and how it can reduce your tax bill.
What are capital allowances?
A capital asset is an item that is used within your business over a long period of time (usually more than two years), and that costs more than your usual day-to-day running costs. Capital allowances allow you to write off the cost of certain capital assets against taxable income to reduce your corporation tax liability.
The two main types of capital allowance are:
Writing Down Allowances (WDAs) for plant and machinery - covering most capital equipment used in a trade; and
Structures and Buildings Allowances (SBA) covering construction and renovation of business structures and buildings.
What is the super-deduction?
In the March 2021 Budget, the Chancellor announced a temporary enhancement to the existing tax relief available through capital allowance.
Companies that invest in qualifying new plant and machinery assets between 1 April 2021 and 31 March 2023 will be able to claim:
A 130% super-deduction first-year capital allowance on qualifying plant and machinery investments
A 50% first-year allowance for qualifying special rate assets.
What is the difference between ‘qualifying plant and machinery investments’ and ‘qualifying special rate assets’?
This broadly relates to the different categories of assets under the normal capital allowance rules.
Plant and machinery eligible for the 130% special allowance would normally be eligible for 18% annual writing down allowances. This includes items such as plant machinery and tooling, computer hardware and software, furniture and commercial vehicles.
Special rate assets that attract the 50% first-year allowance tend to cover improvements to your business premises. Examples include new lifts, electrical, water and heating systems.
Do cars qualify?
No. Whilst commercial vehicles (e.g vans and lorries) may qualify, cars are specifically excluded.
Does the super-deduction apply to sole traders?
No. The allowances only apply to companies paying corporation tax, so individuals, partnerships and LLPs are not eligible. Small company corporation tax bills can be reduced using the super-deduction.
However, remember that the Annual Investment Allowance is available to sole traders, partners as well as companies. This allows you to deduct the total amount of qualifying capital expenditure up to a set limit from taxable profits in a given tax year. As part of the government’s relief package, the limit for this has been extended to £1 million up until 31 December 2021. After that date, it reverts back to £200,000.
How much could my company save in tax with the super-deduction?
The government gives a couple of illustrations:
A company that spends £1m of qualifying expenditure opts to claim the super-deduction
This means the company can deduct £1.3m (130% of the investment) in calculating its taxable profits
This deduction of £1.3m from taxable profits will save the company up to 19% of that: i.e. £247,000 on its corporation tax bill.
Example two (Comparison with the previous system)
A company spends £10m on qualifying assets
It deducts £1m using the AIA in year 1, leaving £9m
It deducts a further £1.62m using WDAs at 18%
Deductions total £2.62m - and a corporation tax saving of 19% x £2.62m = £497,800
The same company spends the same amount (£10m) on qualifying assets
It deducts £13m using the year 1 super-deduction. It receives a tax saving of 19% x £13m = £2.47m
Compared to the previous regime, the super-deduction results in an additional saving of almost £2m.
What should my company be aware of?
Buying ‘nearly new’: a potential false economy
Note that the super-deduction and special rate first-year allowance only apply to the purchase of new plant and machinery. This is in contrast to the standard annual investment allowance and writing down allowances, where expenditure on second-hand equipment qualifies for relief.
Make sure you factor in a comparative AIA/super-deduction calculation when weighing up the relative cost benefits of buying a particular asset new or second-hand.
Leasing and hire purchase
Leased plant and machinery are not eligible for capital allowances, so neither the super-deduction nor 50% relief is available. As with the decision on whether to buy new or secondhand, businesses might want to reassess whether it makes sense to switch from leasing to outright purchase, in order to make use of the super-deduction.
It is possible to access the allowances if your company is buying the assets through hire purchase type arrangements. However, there has to be a clear expectation that legal ownership of the asset will pass to the company at the end of the agreement.
Sale of assets
If you claim the super-deduction on a particular asset and sell it after 31 March 2023, you will need to pay corporation tax on its sale value.
If you sell the asset before 31 March 2023, special rules apply, whereby you need to multiply the disposal proceeds by a factor of 1.3 and add this figure to taxable income.
For a sale of an asset where you have claimed the 50% special rate first-year deduction, 50% of the proceeds are taxed in the year of asset disposal, and the lower of the two - 50% of the proceeds or 50% of the cost is deducted from the special rate AIA pool. To avoid unwelcome HMRC scrutiny, it’s important to maintain accurate records to ensure future disposals are correctly classified.
In the background to all of this, it is important to remember that April 2023 sees an increase in the basic corporation tax rate from 19% to 25%. The unspoken message to business is clear: think seriously about making your big-ticket purchases right now, to ameliorate the pain of tax hikes a little further down the line.
Speak to us today if you need help in maximising the tax efficiency of your asset purchases.