In March last year the Government announced its 130% Super Deduction capital allowance scheme to help businesses grow and thrive, but how does this little-known capital allowance scheme work? Carol Roberts, Director of Asset Finance at Time Finance, shares her thoughts on the value of Super Deduction and why businesses should make their investments in 2022.
What is Super Deduction? Super Deduction is a new enhanced capital allowance that allows companies to claim tax relief when investing in plant and machinery, enabling them to reduce their corporation tax bills through their tangible capital investments. Through Super Deduction, a company can claim a 130% capital allowance on qualifying plant and machinery investments. Super Deduction makes the UK’s capital allowance schemes one of the most competitive in the world.
How would Super Deduction work in practice? As a capital allowance, Super Deduction would be deducted from a company’s taxable profit. If, for example, a company’s taxable profit was £250,000 and it spent £50,000 on a qualifying investment, that company can then deduct £65,000 (130% of initial investment) when calculating its taxable profits. The business would save a total of £12,350 from their corporation tax bill. This can be seen as follows:
- Taxable profit = £250,000
- Value of qualifying investment = £50,000
- Deduction from taxable profit = £65,000 (130% of qualifying investment)
- New taxable profit: £250,000 – £65,000 = £185,000
- Corporation tax to be paid at 19% on £185,000 = £35,150
- Corporation tax saving from Super Deduction = £12,350 (19% of £65,000)
What assets does Super Deduction apply to? There is no set list of qualifying plant and machinery assets, however the kinds of assets that qualify for Super Deduction tend to be hard assets that are used for the commercial operations of a business. These could be construction machinery, printing presses, refrigeration or manufacturing equipment.
When can you use Super Deduction? Super Deduction applies to qualifying investments made between 1 April 2021 to 31 March 2023. The rate of the Super Deduction would need to be adjusted if an accounting period goes beyond 1 April 2023 or if a company disposes of an asset on which Super Deduction or special rate allowance was claimed.
What is the benefit of Super Deduction? Super Deduction allows companies to invest in equipment and reduce their corporation tax bill, enabling them to bring forward investment in assets that will aid business growth in the aftermath of the Covid-19 pandemic. The Government’s intention with Super Deduction is to provide a catalyst for growth and increase economic productivity in the UK.
What if you don’t have capital to invest in new assets? Many businesses simply don’t have the working capital to invest in new machinery and if that’s the case there are other funding options available. At Time Finance, we provide our clients with asset finance solutions making the acquisition of vital equipment and machinery possible whilst spreading the cost over agreed time periods. If a business goes down this route, then it’s a win win situation where they benefit from income generating equipment at affordable rates whilst using this purchase to reduce their corporation tax bill.
What is the 50% First Year Allowance? Also announced in the Government’s Budget was the 50% first-year allowance (FYA) for qualifying special rate assets. Much like the Super Deduction, the 50% FYA is a temporary capital allowance relief. Super Deduction applies to the main rate pool, which includes plant and machinery, whereas the 50% FYA applies to the special rate pool, which covers integral building features, such as lifts and air conditioning, or items with a useful life of at least 25 years.
What is a Writing Down Allowance and how does it differ from Super Deduction? A Writing Down Allowance (WDA) is the broad term for a capital allowance on hard assets and so in essence, Super Deduction is a WDA but with a big difference. The new 130% Super Deduction is far more generous as it applies to Plant and Machinery that would ordinarily qualify for a 18% Writing Down Allowance (WDA). Similarly, the new 50% FYA special rates allowance applies to investments that would ordinarily qualify for a 6% WDA.
Did the Government announce other forms of tax relief in the Autumn Budget 2021? Yes. There is currently a 100% Annual Investment Allowance (AIA) for qualifying expenditure on plant and machinery up to the value of £1 million, which works in the same way as the Super Deduction. This was previously capped for expenditure up to £200,000, however the Government announced the increase to £1 million from January 2021. This was set to end on 31 December 2021 but has since been extended to 31 March 2023.
How do you know which tax relief to use? This all depends on what your company’s expenditure qualifies for and which would bring you the most financial benefit. For example, for many companies, the 100% Annual Investment Allowance would create a greater tax relief than the 50% FYA special rates allowance. Larger businesses where profits exceed £250,000 have got to remember that corporation tax will rise to 25% in April 2023 so they should make the most of the available forms of tax relief ahead of this change.
What tax relief is available to small and medium sized businesses? The 130% Super Deduction and the 50% FYA special rates allowance are both available to small and medium sized businesses, as is the 100% Annual Investment Allowance. They can also benefit from the SME Research and Development (R&D) tax relief, which entitles a business to an additional 130% tax relief. To qualify for the R&D tax relief, investments must meet the Government’s definition for R&D, which is broadly defined as designed to advance innovation in science and technology. The beauty of the R&D tax relief is that it can be used in conjunction with the 100% Annual Investment Allowance, making a total 230% deduction.
More information can be found on the current forms capital allowance by visiting the Government website here.
For more information visit www.timefinance.com.