Super Deduction for Capital Allowances Explained

As of the 1st April 2021, an investment your company makes in plant and machinery may qualify for a 130% capital tax allowance. Here, we explain more about the Super Deduction for Capital Allowances, what qualifies for it and how it can benefit your business.

What is the Super Deduction for Capital Allowances

It was announced in the budget that for two years from 1st April 2021, investments that a company makes in new plant and machinery may qualify for the deduction. This means that effectively, for every £1 a business invests in qualifying items, they will be able to claim back 25p. This level of return and tax savings is one of the most attractive tax incentives for business investment that the British Government has ever offered.

Companies can also benefit from the SR Allowance which is a 50% first-year allowance for qualifying special rate assets.
By taking advantage of either of these incentives, businesses can invest heavily in important equipment to grow their business whilst also being able to reduce their Corporation tax bill until 2023.

Why has the Super Deduction been introduced?

The Super Deduction was announced by Chancellor Rishi Sunak who said it’s a “direct way to help business investment” which in turn will drive growth in the economy. With the COVID 19 pandemic, the hopes are that this tax incentive scheme will help increase productivity and will give businesses and the overall economy a post-pandemic boost that is so desperately needed.

The hope is that by 2023 when the Super Deduction is over, companies will be in a much stronger position and lead to more corporate profits that the government can tax from 2023 onwards.

What is classed as a “qualified” expenditure?

The following items are included in the list of qualifying expenditure for the Super Deduction, however, this is not an exhaustive list:

• Tractors, lorries, vans
• Office furniture such as desks and chairs
• Computers
• Servers
• Machinery

Whilst the list of qualifying expenditure is broad, there are limits to what is included. For example, whilst a business can claim for vehicles such as vans and tractors, company cars are not included. Items must be new and unused, with second-hand items being excluded from the tax incentive. Also excluded are assets that are leased out. Therefore, it is important you check whether the item you want to invest in is included and not just assume that it is.
In addition to this, Integral Features such as solar panels, air-conditioning and electrical, water or heating systems qualify for the 50% SR Allowance.

Who is eligible for the Super Deduction?

All companies that pay Corporation tax are available for the Super Deduction. Individuals who are sole traders or professional partnerships are unfortunately not eligible. The great news is that there is no limit or cap to the expenditure for either the Super Deduction or the SR Allowance. However, the expenditure has to be incurred between 1st April 2021 and 31st March 2023. Any money spent on qualifying assets outside of this time frame will not be included. Contracted entered before 3 March 2021 (Budget day) are treated as through the expenditure was incurred at the contract date and therefore does not qualify.

Assets purchased under a hire purchase contract entered into on or after 3 March 2021 will be eligible for the Super Deduction and the SR Allowance, provided they meet specific conditions. The date of the contract and the date that the asset enters into qualifying use are important to determine the availability of the enhanced allowances. There are also conditions in relation to the terms of the hire purchase contract. Please ask us for further advice on the position for hire purchase contracts to check they qualify.

What happens if the assets are sold?

If an asset is sold or disposed of within the time frame which would have been eligible for the Super Deduction or the SR Allowance, a balancing charge will arise that is based on a proportion of its disposal value.

Is the Super Deduction worth it for businesses?

The scheme in the short term can be extremely beneficial for companies. For those who were already going to be investing in the equipment, it is ideal. For others, the timing will help bring the need for investment forward which in turn can help them grow their business sooner than anticipated. However, it is important before making any investment decisions that businesses consider all the angles. Whilst this is a great opportunity to make investments in your business and take advantage of this opportunity, once the scheme is over, the corporation tax rate is scheduled to rise to 25% where profits exceed £250,000; which businesses need to also be prepared for.

Conclusion

As the article highlights, the Super Deduction capital allowance and SR Allowance can benefit a lot of companies and give them the chance to invest in more machinery and equipment than they would have been able to before. However, it is only a temporary measure, so you need to act if you want to make the most of this. The businesses that plan well in advance will be the ones that can maximise their tax savings from this scheme. If you have any questions regarding the Super deduction or SR Allowance, then get in touch with a member of the Wright Vigar team. We will be able to take you through the process of what you need to do, in terms of bookkeeping, so you can claim for this allowance at the end of the financial year.