In its 2021 budget, the UK government introduced a super-deduction tax break. The idea behind it is to drive investment by taking money off the bills of companies that invest in plant and machinery.
Here, we look at how this new type of corporation tax relief works, and how your business could benefit from it.
How Does the Super-deduction Work?
The super-deduction is a capital allowance. You can use a capital allowance to write off the cost of certain capital assets against your taxable income.
The super-deduction tax break offers 130% relief on qualifying plant and machinery investments.
It's usual for this type of expenditure to come within a company's annual investment allowance (AIA) tax relief, or for the company to claim relief of 18% of the cost per annum.
But with the super-deduction, companies can claim a much higher amount in relief:
· If you spend £100,000 on plant and machinery, the super-deduction would be £130,000. This gives your company back £24,700, based on corporation tax relief of 19% on £130,000.
· If you spend £1m, the deduction would be £1.3m, saving you £247,000 on your corporation tax bill.
The super-deduction tax relief runs from 1 April 2021 to 31 March 2023.
After the end of March 2023, the system will go back to what it was before, with companies writing off investments in machinery over several years, at 18% of their remaining value.
Pre-April 2021, the UK's capital allowances were trailing behind the average for OECD countries.
Therefore, you could see the super-deduction tax break as part of the government's levelling up strategy. The Office for Budget Responsibility (OBR) predicts that at its peak, the super-deduction should increase the level of business investment by 10%. This is around £20bn a year.
What Does Super-deduction Apply To?
There are various assets which you can claim super-deduction for, such as:
· Lorries, vans and tractors
· Cranes, drills and ladders
· Electric vehicle (EV) charge points
· Computer equipment, including servers
· Office furniture
· Refrigeration units
· Solar panels
· Foundry equipment
The Treasury states that this list is not comprehensive, and there will be other forms of plant and machinery you can claim for.
You cannot claim super-deduction for:
· Second-hand or used assets
Does Super-deduction Work With Asset Finance?
This will be a critical question for many SMEs because up to a fifth of them use asset finance or hire purchase to buy equipment.
According to the government's draft legislation for the super-deduction relief, companies purchasing plant and machinery using asset finance or hire purchase may need to meet additional conditions.
These conditions may be to ensure that the deduction definitely goes to the purchaser rather than to the lender.
These additional conditions are:
· You're paying a periodical sum, and in return plant and machinery assets are hired to you
· Eventually, you'll end up owning these assets
· That as the person or business hiring the assets, you're paying for the contract and therefore incurring the expenditure.
Should You Take Advantage of the Super-deduction?
This is a temporary policy, designed to spur investment in assets, following a sharp decline during the pandemic. You've got until 31 March 2023.
Making investments normally requires a degree of lead-time, so you should factor this in if you think you'd qualify for the super-deduction tax relief.
Will it fit in alongside other tools for raising funds for investment, such as asset financing?