When Rishi Sunak stepped forward to deliver the March 2021 budget, he must have felt the eyes of every business owner in the UK on him. More than 12 months into the COVID-19 pandemic that has devastated our economy, how was the government going to stimulate investment and growth? How would Mr Sunak inject some much-needed hope? Would he be wearing a red cape, waving a magic wand, or brandishing a giant mythical hammer?
No such luck, but he did come out armed with a metaphorical tax hammer and some almost magical words for UK businesses: “Today I can announce the ‘Super Deduction’.”
PLEASE NOTE: The super-deduction is only available to companies paying corporation tax, not to individuals, sole traders, or partnerships paying income tax.
What is the super-deduction?
After one of the worst periods in recent economic history, the government’s message to both consumers and businesses is the same: Spend, spend, and then spend a little more. Please.
Unfortunately, with so many businesses focusing on trying to keep their heads above water, investing in new assets is unlikely to be top of their to-do list.
To ease – or kick – businesses into action, the government has announced the super-deduction. By knocking up to 25p off their tax bills for every £1 spent on qualifying plant and machinery between April 2021 and March 2023, the plan is to encourage companies to invest, and therefore grow, sooner rather than later.
What’s so super about the super-deduction?
Prior to the super-deduction, under the Annual Investment Allowance (AIA), companies could deduct 100% (up to £1 million) of the cost of assets from their taxable profits. As of April 2021, companies paying corporation tax can deduct up to 130% of the cost of new assets from their taxable profits.
To illustrate the potential savings on offer for UK companies that pay corporation tax, here are a couple of examples.
|Company A – spending £100,000 on qualifying assets||Company B – spending £500,000 on qualifying assets|
|Before super-deduction||Via the AIA, the company deducts £100,000 (100% of the cost of the assets) from their taxable profits.|
When corporation tax is applied to taxable profits at 19%, they receive a £19,000 reduction on their corporation tax bill.
|Via the AIA, the company deducts £500,000 (100% of the cost of the assets) from their taxable profits.|
When corporation tax is applied to taxable profits at 19%, they receive a £95,000 reduction on their corporation tax bill.
|After super-deduction||Via the super-deduction, the company deducts £130,000 (130%) from their taxable profits.|
When corporation tax is applied to the remaining taxable profits at 19%, Company A receive a £24,700 reduction on their corporation tax bill.
|Via the super-deduction, the company deducts £650,000 (130%) from their taxable profits.|
When corporation tax is applied to the remaining taxable profits at 19%, Company B receive a £123,500 reduction on their corporation tax bill.
|Additional tax savings due to the super-deduction||£5,700||£28,500|
Is it really that simple?
When are taxes simple? These examples have been included for illustrative purposes only, as every business’ financial situation and investment will be different. For example, restrictions may apply if an accounting period straddles the dates of the schemes, and not all assets are eligible for the super-deduction. There are also ‘clawback rules’ on super-deduction investments which might mean that businesses could be charged significantly if they sell the items at a later date. The super-deduction is a final tax relief which means it will be applied after all other tax deductions in that tax year. The super-deduction cannot create a taxable loss.
Thinking of investing in assets for your business? Want to make the most of the super-deduction tax benefit but not sure where to start? We can help. Click here to get in touch.
What will happen when the super-deduction ends?
Shockingly, the government is not offering the super-deduction out of the kindness of their hearts. The super-deduction is a temporary incentive intended to get the economy moving as soon as possible.
From 1st April 2023, corporation tax will increase from 19% to 25% for companies with over £250,000 in taxable profits, and without careful planning, those businesses will find that their super-deduction benefits will be nullified once they are paying the higher tax rate. For companies with less than £50,000 in taxable profits corporation tax will remain at 19%. Businesses with taxable profits between £50,000-£250,000 will pay the main rate reduced by marginal relief.
The AIA’s upper threshold of up to £1 million will only be available until the end of March 2023 when it will reduce to £200,000.
It is important to seek professional and bespoke financial advice for your business to ensure that you make the most of the super-deduction scheme while it is available and that you have planned for future rises in corporation tax.
Which companies are entitled to claim the super-deduction?
The super-deduction is available to companies of all sizes, as long as they pay corporation tax, and the assets they are investing in are eligible.
The super-deduction is not available to individuals, sole traders or partnerships.
In addition to the super-deduction, the government has also announced that within Freeport tax sites, companies can access Enhanced Capital Allowances (ECA+), and that companies, individuals, and partnerships can access an increased level of Structures & Building Allowances (SBA+) until 30th September 2026.
Which assets are eligible for the super-deduction?
According to HMRC, “Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances.”
To qualify for the super-deduction, the assets must be new and unused, so second-hand equipment will not be eligible.
Examples of eligible plant and machinery assets include, but are not limited to:
- Solar panels
- IT equipment and servers
- Office desks and chairs
- Tractors, lorries and vans (not cars)
- Refrigeration units
- Electric vehicle charge points
- Foundry equipment
- Drills, ladders, cranes
- Business mobile phones
- Air conditioning.
The super-deduction first year allowance of 130% will apply on qualifying main rate plant and machinery like those listed above, but special rate and long life assets will only qualify for 50% first year allowance (FYA).
The government has provided the following table as a guide to which investments are eligible for which tax benefits. This table was correct as of 28th April 2021, but the most recent information can be found here: Super-deduction – GOV.UK (www.gov.uk).
|Bought new||Bought 2nd-hand||Assets held for leasing||Main rate assets||Special rate assets||New disposal rules|
|Super-deduction (130% FYA)||X||X||X|
|Special Rate (50% FYA)||X||X|
|Annual Investment Allowance (100% up to £1 million)||X||X||X||X||X|
|Writing Down Allowances (18%)||X||X||X||X|
|Writing Down Allowances (6%)||X||X||X||X|
|Freeports (100% ECA, uncapped)||X||X||X|
Are assets purchased on finance eligible for the super-deduction?
There are some additional conditions to be aware of if you are using finance to buy your assets. Specifically, the super-deduction only applies to “the person to whom [the equipment] is bailed or hired is the person who incurs the expense”. To ensure this, the following conditions need to be met in order for a financed asset to qualify for the super-deduction:
- You are paying a periodical sum and in return plant and machinery assets are “bailed” (hired) to you.
- Eventually you can end up owning those assets (such as by exercising an option to purchase or paying a fee).
- The person hiring/receiving the goods is the one paying for it (to ensure that the business rather than the finance lender benefits).
How to take advantage of the super-deduction
If you are running a company that pays corporation tax and want to take advantage of the super-deduction while it is available, get in touch with Bluestone Leasing. We can help you to understand how the super-deduction could benefit your business as well as how asset finance could fit into your future growth strategy.