All you need to know about the tax super-deduction

Taxes and investments are normally at opposite ends of a business balance sheet, however the tax super-deduction is a clever Government incentive aimed at rewarding growing companies.

Available since April 1, 2021, the initiative is designed to promote the use of capital allowances, therefore encouraging growth and investment. This is seen as being particularly important as the UK economy bounces back from the Covid-19 pandemic.

What is the tax super-deduction?

Capital allowances allow qualifying companies to write off the cost of certain capital assets against taxable income. The tax super-deduction is a new 130% first-year capital allowance for qualifying plant and machinery assets, with a 50% first-year allowance for qualifying special-rate assets.

For example, if a stationery company spends £100,000 on printing equipment, then the company would be able to claim a deduction of £130,000 (130%) against taxable profits, therefore reducing their corporation tax bill by £24,700.

Normally, these assets would qualify for an 18% plant and machinery capital allowance and a 6% first-year allowance on special rate pool expenditure, if a business’s Annual Investment Allowance had been used up. With corporation tax at 19%, the super tax deduction could mean the business’s tax bill could be cut by nearly 25p for every £1 of qualifying spend.

The scheme runs from April 1, 2021 until March 31, 2023.

Why was the tax super-deduction introduced?

The scheme is one part of the Government’s plan to boost UK businesses, which it is hoped will lead to a faster recovery following the pandemic. Data shows that business investment dropped by 11.6% between Q3 2019 and Q3 2020.

The hope is that by encouraging investment in new technology and machinery, the country’s productivity level should improve.

What businesses are eligible?

The tax super-deduction is aimed at larger companies, particularly in the manufacturing and engineering sector. As it only applies to businesses that pay corporation tax, the scheme is not open to sole traders, partnerships and LLPs.

How does the special-rate allowance work?

If the stationery company mentioned above spends £100,000 on upgrading factory heating, it would not qualify for the main pool, as the work was on an integral feature of the building. Assets with an expected life of more than 25 years are also excluded.

However, the special-rate allowance would give the company a tax deduction of £50,000 in the first year to offset against its corporation tax profits. This equates to a tax deduction of £9,500 being 19% of £50,000. Normal tax deductions will apply for the remaining £50,000 over following years.

What investment is covered by the tax super-deduction?

Capital investment must be in new and unused assets to qualify as main pool expenditure, subject to some specific exclusions. Certain assets like cars do not qualify.

Plant and machinery expenditure which is incurred under a hire purchase or similar contract must meet additional conditions to qualify for the super-deduction and special-rate relief.

Qualifying plant and machinery assets that would usually qualify for the 18% main pool rate of capital allowance include:

  • Computer equipment
  • Tractors, lorries, vans
  • Ladders, drills, cranes
  • Office furniture
  • Electric vehicle charge points
  • Refrigeration units
  • Compressors.

New plant and machinery covered by the special-rate allowance that would usually qualify for the 6% special rate pool include:

  • Solar panels
  • Foundry equipment
  • Water pipes or an electrical system within a building.

Need help?

If you require professional guidance on the tax super-deduction, please arrange an appointment with us here.

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