Of all the measures announced during this years Spring budget, the one that has instigated the most queries from clients is the new “super-deduction” for spending on capital equipment. To help answer these queries, we've summarised what the new measure means, when it will be available and who will qualify.
Why has the super-deduction tax relief been introduced?
To encourage companies to invest in new capital equipment, the Chancellor announced a radical new “super-deduction” as part of his Spring budget.
What is the super-deduction tax relief?
The idea is that companies will be able to claim a deduction from their tax bill if they invest in new plant and machinery for their business. Under the super deduction, you are allowed a capital allowance of 130% on your qualifying plant and machinery investments. This would mean that when a company buys assets costing £10,000 they would qualify for a £13,000 deduction in arriving at business profits.
If you were to purchase a new laptop prior to 1 April 2021 for £1,000 then that would reduce your corporation tax liability by £190. If this purchase is made between 1 April 2021 and 31 March 2023 then the tax reduction would increase to £247. You can see that this is a significant saving, and will have a significant impact on those businesses investing heavily in new equipment.
When will it be available?
The new deduction will run for two years from 1 April 2021.
Who qualifies for super-deduction?
This relief will only apply to companies and will not be available to sole traders or partnerships. As the super deduction will not be available to sole traders and unincorporated businesses, they will continue to claim the Annual Investment Allowance (AIA) on eligible capital expenditure.
It is worth noting that companies with special rate expenditure will only benefit from a 50% allowance. They may be better off allocating the AIA to special rate assets instead.
Quite often, businesses with a 31 March year-end may normally plan a capital spend before their year-end. However, this year they may wish to wait until on or after 1 April 2021 to plan their capital spend. Please contact us if you are unsure of your best course of action on this.
What equipment can I claim super-deduction against?
The super deduction can only be claimed on expenditure on new assets. They must not be second hand.
Super-deduction will not be available on motor cars. Certain assets such as fixtures in buildings will only qualify for 50% relief in the first year instead of the normal 6% writing down allowance.
The kind of assets that qualify for the super-deduction include but are not limited to:
- Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Office chairs and desks
- Electric vehicle charge points
- Most plant and equipment
One important note about the super-deduction measure is that if you decide to dispose of the asset you purchase before the end of the regime, it could result in costing you more in tax than you got a deduction for. We would urge you to keep track of all assets you purchase and ensure that if you do decide to sell them that you seek advice in order to ensure you understand the tax implications.1
The 130% super deduction, combined with the current corporation tax of 19%, means that for every £100,000 you spend, you get £24,700 back in tax reductions. But if you decide to wait two years and have to pay corporation tax at 25% with no super-deduction, a £100,000 expenditure would allow for a tax reduction equalling £25,000. However, if the AIA reduces in the next two years, it could undo any benefits of waiting, which could mean missing out on any advantages of the super-deduction2.
- Super-deduction applies to purchases from 1 April 2021 for 2 years.
- Super-deduction will predominantly apply to plant and equipment, fixtures and fittings. It does not apply to company cars.
- The equipment purchased must be new, not second hand.
- Unfortunately, the super deduction is only available to limited companies, not sole traders or partnerships.
Want to know more? Get in touch with the team today to see how we can help.