Super Deduction Capital Allowance

What is Super-Deduction?

The super-deduction is a mechanism to encourage companies to invest for the next two years by introducing an enhanced capital allowance.

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Between 1st April 2021 to 31st March 2023 companies are able to invest:

  • on plant & machinery capital expenditure and claim 130% relief on new assets that ordinarily qualify for 18% main rate writing down allowance
  • get a 50% first year allowance for qualifying special rate assets that ordinarily qualify for 6% special rate writing down allowance

Why do we have Super-Deduction?

Due to the Covid pandemic business investment has fallen, 2020 Q3 showed a decline of over 11% compared to the same period last year.

It is believed much of UK’s productivity gap when compared with its competitors is driven by historically low levels of business investment since 2008.

The generous capital allowance has been introduced to stimulate business investments and hoping that this will also promote economic growth.

What is Capital Allowances?

Capital allowances allow companies to write off their investment against their profits and thereby reducing their corporation tax bill in the year.

Example:

Where a company has profits of £100,000

Invested £20,000 in the year on qualifying expenditure

This means the company is able to deduct £26,000 (£20,000 x 130%) from its profits before paying corporation tax

(£100,000 – £26,000) x 19% = £14,060

£26,000 deduction provides a £4,940 saving on your corporation tax bill within the year.

Criteria to be met….

There are a few criteria’s that will need to be met:

  • Does not apply if the contract for the asset was entered into prior to 3 March 2021, even if the expenditure is incurred in the qualifying period
  • Plant and machinery is brand new, i.e. not second hand
  • There are other rules that exclude certain items where the allowances cannot be claimed. Some examples of these include: cars, leased items, where costs have been incurred to change the nature of the business etc
  • Where an accounting period straddles April 2023, the deduction will be apportioned based on the number of days in the accounting period falling before 1 April 2023 versus the number of days falling after this date

What happens if I dispose of the assets?

Where an asset has benefited from the super-deduction has been sold, the disposal value are also treated in the same way, as accordance to the Capital Allowances Act 2001. This is called a “balancing charge”.

If the disposal disposal takes place before 1 April 2023, this special balancing charge calculation is carried out on assets which the super deduction was previously claimed. Therefore a factor of 1.3 is applied to the disposal value for the year of sale of the asset.

If this disposal occurs after 1 April 2023, then the charge is subject to 25% corporation tax rate, whilst the original relief was given against the current 19% corporation tax rate.

Therefore it is important that companies wishing to benefit from the super-deduction should plan the timing of qualifying investments so that the expenditure is incurred in the qualifying two-year period.

Where significant investment is planned after 1 April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.

Where a company is in a loss making position or has low profits it may wish to claim the writing down allowance instead of the super deduction. Likewise, if the plan is to sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing charge on the disposal.