The Super-Deduction - Capital Allowances
A new 130% first year capital allowance for qualifying plant and machinery assets; a 50% first year allowance for qualifying special rate assets. We will cover everything in this blog so you know exactly what’s included and take advantage of this scheme.
The Super Deduction will apply from 1st April 2021 until 31st March 2023.
It will allow companies to reduce their tax bill by up to 25p for every £1 they invest making this capital allowance regime one of the most competitive in the world. The Government is encouraging firms to invest in productivity-enhancing plant and machinery assets that will help them grow, and to make them investments now.
The New Capital Allowances offer Businesses to benefit from four significant capital allowances measures:
- There super-deduction - which offers 130% first year relief on qualifying main rate plant and machinery invests until 31st March 2023 for companies
- The 50% first-year allowance (FYA) for special rate (including long life assets) until 31 March 2023 for companies
- Annual Investment Allowance (AIA) providing 100% relief for plant and machinery up to its highest ever £1 million threshold, until 31 December 2021
- Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and compares, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA) for investments until 30 September 2026
What Are Capital Allowances?
Capital allowances let taxpayers write of the cost of certain capital assets against taxable income. It takes place of accounting depreciation which is not normally tax-deductible.
A business is usually required to ‘add back’ any depreciation, but can instead deduct capital allowances. For example, a corporation tax paying company with:
Accounting profits of £1,000
Depreciation expense of £200
Capital allowance claim of £300 would make the following adjustments
- Add back £200 (depreciation expense) to £1,000 (accounting profits) = £1,200
- Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits)
- Apply appropriate tax rate, e.g. corporation tax at 19%: £900 x 19% = £171 tax due.
The two main types of capital allowances are:
- Writing Down Allowances (WDAs) for plant & machinery - covering most capital equipment used in trade; and
- Structures and Buildings Allowances (SBA) - covering the construction and renovation of non-residential structures and buildings
The 130% super deduction and 50% first-year allowance are generous capital allowances for investments and will allow you to lower your corporation tax bills.
What Is Plant and Machinery?
Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances.
There is not an exhaustive list of plant and machinery. The kinds of assets which may qualify for either the super-deduction or the 50% first-year allowance include, but not limited to:
- Solar panels
- Computer equipments and servers
- Tractors, lorries, vans
- Ladders, drills cranes,
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Foundry Equipment
More details of eligibility of different types of investments for different types of capital allowances are summarised below:
Examples of the Super-Deduction
- A company incurring £1m of qualifying expenditure decides to claim the super deduction
- Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing taxable profits
- Deducting £1.3m from taxable profits will save the company up to 19% of that - or £247,000 - on its corporation tax.
- A company spend £10m on qualifying assets
- Deducts £1m using AIA in year 1, leaving £9m
- Deducts £1.62m using WDAs at 18%
- Deductions total £2.62m - and a tax saving of 19% x £2.62m = £497,800
With the Super Deduction:
- The same company spends £10m on qualifying assets
- Deducts £13m using the super deduction in year 1
- Receives a tax saving of 19% x £13m = £2.47m
The super deduction is around until 31st March 2023 and companies should take advantage while it is around. As we said this is one of the world's most competitive capital allowance schemes and unlikely to see something like this again. If you need help or clarity over what could apply please get in touch and we will be more than happy to help!
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