The SAS Accounting team regularly highlights tax schemes and allowances that seem to fly beneath the radar - and the super-deduction is one of the most favourable (yet under-utilised) tax incentives ever offered.
As part of the drive to boost economic growth, from 1st April 2021, businesses can claim a capital allowance deduction of 130% against investments in plant and machinery.
That means every £1 of investment receives a £0.25 government bonus, although the scheme is only valid for two years.
The Super-Deduction Explained
This tax incentive is designed to encourage businesses to invest, support the economy, and improve productivity as we recover from the pandemic.
Successful businesses mean more profits and higher Corporation Tax charges, so it's about engineering a trading climate that, eventually, will be advantageous all-round.
There are two potential ways to benefit and minimise your Corporation Tax bills:
- Investments in 'main pool' plant or machinery qualify for a capital allowance deduction of 130%.
- A 50% allowance applies to eligible special assets in the first year, called the SR Allowance.
If you make a qualifying investment, you get a much higher tax deduction than you'd normally be entitled to via the regular First-Year Allowance (FYA).
An Example of the Super-Deduction in Action
The easiest way to explain the outcome of the super-deduction is to run through a theoretical example - we'll imagine you spend £100,000 on equipment (more on the criteria shortly!).
- In your Corporation Tax calculation, the value deductible from your profit is £130,000 - the investment x 130%.
- Your company saves 19% of that deduction by reducing your profits exposed to Corporation Tax, so a £24,700 saving in this illustration.
The 130% super-deduction applies to asset purchases that normally receive an 18% capital allowance.
What is the SR Allowance?
The special 50% rate, or SR Allowance, works similarly to the super-deduction in our example above.
The SR Allowance applies to investments that aren't main pool assets and would normally attract a 6% capital allowance.
In year one, if you spent £1 million renovating your business site to incorporate new features, you could claim a £500,000 tax deduction.
That offset would result in reduced Corporation Tax against £500,000 of your profits or a £95,000 tax saving.
You would continue to receive tax deductions for the £500,000 balance at the normal 6% capital allowance per annum for the subsequent years.
Which Plant and Machinery Investments Qualify for the Super-Deduction?
The eligibility criteria are fairly broad, and any new plant or machinery that would normally receive an 18% capital allowance as part of the main pool qualifies, such as:
- Office furniture
- Computer equipment
- Electric charging stations
- Refrigeration equipment
- Cranes, drills or ladders
Which Investments Qualify for the SR Allowance?
Any plant or machinery that is classed as within your special rate pool, such as integral building features or long-life assets, may be eligible for the SR Allowance:
- Piping or electrical systems
- Solar panels
- Foundry equipment
Some expenditure classes, such as buying second-hand plant or machinery, or company cars, are excluded.
Claiming the Super-Deduction Capital Allowance
If you invest in qualifying assets from 1st April 2021 until 31st March 2023, your business should be eligible.
For more information about the allowances, applying them to your Corporation Tax return, or planning for an eligible investment, please get in touch with the SAS Accounting team.