Corporation tax – ‘Super Deduction’ scheme
What is the ‘super deduction’?
The super deduction scheme was introduced on 3rd March 2021 to encourage UK businesses to invest in plant, machinery and equipment. In its very simplest terms, the scheme allows companies to cut their tax liability by 25p for every £1 that they invest in new plant and machinery and that includes computer and network equipment!
It applies to assets purchased between 1st April 2021 until 31st March 2023. Only businesses subject to corporation tax can claim this relief. Therefore, sole traders and partnerships are not eligible.
What are the technicalities of the scheme?
As you can imagine, being a tax related incentive there are plenty of technicalities. Given that we are not accountants, or tax specialists we thought we’d enlist the help of people who actually know what they’re talking about.
We asked tax specialists Drummond Laurie to prepare a summary for us to share below but our strong advice is to speak to Drummond Laurie by calling 01324 441250 or visiting or www.drummondlaurie.co.uk about the scheme to learn how it could benefit your organisation.
Drummond Laurie’s Overview of Super Deduction
Changes to current rules
The new rules allow for:
- A super-deduction providing allowances of 130% on most new plant and machinery investments, that ordinarily qualify for 18% main rate writing down allowances.
- A first-year allowance (FYA) of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
1. 130% super deduction
This means that for every £1 a company invests, their tax liability is cut by up to 25p.
This would apply to assets that are normally allocated to the ‘main pool’, such as:
- Computer equipment
- Plant and machinery
- Commercial vehicles
- Office equipment and furniture
The above is not a definitive list.
2. 50% FYA deduction
This relates to assets that would normally be allocated to the ‘special rate’ pool such as:
- Integral features, e.g. lifts and air conditioning
- Solar panels
Again, this is not a definitive list.
What is excluded?
Despite the above items being included, certain expenditure will be excluded. Used and second-hand assets do not qualify.
If the contract for expenditure was entered into prior to 3rd March 2021 for delivery after 1st April 2021, they will not qualify.
Long-life assets and cars are excluded but vehicles not deemed to be cars (vans, motorbikes etc used for trading purposes) are within the scope. A long-life asset is plant or machinery which would reasonably be expected to have a useful economic life of at least 25 years when new.
Assets bought on Hire Purchase Agreements will qualify for the super-deduction.
How does this interact with the existing annual investment allowance?
Unlike the annual investment allowance (AIA) which has a limit of £1m per accounting year the super deduction has no upper limit.
Companies planning on investing more than £1m in plant, machinery and equipment in the coming years should consider bringing forward this expenditure in order to take advantage of the super deduction before 31st March 2023.
What happens if we sell the asset later?
The disposal value for plant and machinery will be arrived at in the same way as it was under the ‘old’ rules. The difference however is that the amounts claimed under the super deduction or FYA will automatically be a balancing charge. For assets that have been claimed under the super deduction, the disposal value for capital allowances purposes should take the proceeds received and apply a factor of 1.3. This applies to disposals before 1st April 2023.
This factor does not apply to disposals after 1st April 2023. This is because the balancing charge after this date will be subject to corporation tax at 25% (or a marginal rate), instead of 19% due to the change in tax rates from this date.
Therefore, even though assets claimed under these new allowances do not enter the main or special rate pool in the year of purchase, companies must track the assets to ensure the correct disposal value and balancing charge is applied.
What if we have losses?
As with the previous capital allowance rules, the deduction can be made to generate a loss. This loss can be carried forward or carried back 3 years under the new temporary loss carry back rules that were announced on 3rd March 2021. It is also possible for part of the allowances to be disclaimed, although this is unlikely to be the most tax efficient option.
A company invests in IT equipment and software (a qualifying asset) on 30th June 2021 for a cost of £100k.
|Tax relief under ‘old’ rules
||Tax relief under super deduction
|Maximum AIA available = £100k
||Super deduction relief (£100k @ 130%) = £130k
|Total capital allowances in year 1 = £100k
||Total capital allowances in year 1 = £130k
|Tax saving @ 19% in year 1 = £19k
||Tax saving @ 19% in year 1 = £24.7k
In this case, as a result of the super deduction, a company can save c£5.7k in corporation tax in the year of purchase.
A company invests in insulation (a special rate asset) on 30th June 2021 for a cost of £3m.
|Tax relief under ‘old’ rules
||Tax relief under FYA
|Maximum AIA available = £1m
||Maximum AIA available = £1m
|Writing down allowances (£2m @ 6%) = £0.12m
||FYA relief (£2m @ 50%) = £1m
|Total capital allowances in year 1 = £1.12m
||Total capital allowances in year 1 = £2m
|Tax saving @ 19% in year 1 = £0.21m
||Tax saving @ 19% in year 1 = £0.38m
In this case, as a result of the first year allowance, a company can save c£170,000 in corporation tax in the year of purchase. The balance of the asset then goes into the normal special rate pool in future years.
For all companies, it will be more beneficial to claim the super deduction as opposed to AIA. For companies investing less than £1m in special rate assets, it would still be more beneficial to claim AIA over the FYA in order to obtain 100% relief.
If you’d like to learn more about investing in your IT equipment then get in touch with us today.