The Super-Deduction Scheme - How Does It Work?

Gary Green
Gary Green
August 16, 2021

You may have heard the term 'super-deduction' recently and wondered if you could be affected by the two newly introduced tax relief options...

Companies subject to corporation tax can benefit from these deductions that have been introduced by the government to stimulate economic growth post-COVID 19.

This is not the first time that the UK government has implemented such measures and companies should be planning now to take full advantage of this.

Increasing productivity is at the heart of the HM Treasury's new tax scheme and has been widely accepted by qualifying businesses.

What Are The New Tax Allowances?

From the start of April 2021 until the end of March 2023 if you purchase qualifying machinery and plant assets then you will benefit from the following tax reliefs:

  • You will be entitled to a 130% super-deduction capital allowance on all machinery and plant investments that your business undertakes.
  • In addition, you will receive a 50% year 1 relief for qualifying special rate assets.

Also, please note:

  • The AIA will provide 100% relief for the qualifying investments on assets up to its highest ever level of £1 million. This will be run up until 31 December 2021.
  • The government has introduced Freeport tax sites to boost trade. Businesses in these areas can apply for the new ECA+ (Enhanced Capital Allowances).
  • Several company types can gain from an improved Structures & Buildings Allowance (SBA+) up until 30th September 2026.

What Is Considered To Be Qualifying Plant And Machinery?

When considering claiming capital allowances you will need to consider that “most tangible” capital assets that are used to conduct business will indeed count as “qualifying plant and machinery”.

The sort of plant/machinery assets that you can expect to be subject to the super-deduction scheme are listed below:

  • Foundry equipment
  • Computer equipment and servers
  • Tractors, lorries, vans
  • Compressors
  • Refrigeration units
  • Electric vehicle charge points
  • Ladders, drills, cranes
  • Office chairs and desks
  • Compressors
  • Solar panels

This is not an exhaustive list and you should always check with an informed tax advisor before setting out to claim the super-deduction.

It also important to note that the tax relief does not cover businesses buying machinery to then lease on at a profit. It is important to make the distinction between being used for the sustained internal operations of the business and those pieces of machinery and plant that are leased out to external businesses or individuals, which are stock, not capital acquisitions.

It should be noted that on the 18th May 2021 an important change was made concerning the Finance Bill. This was made to guarantee that investors in property would still benefit and the bill focuses on any mandatory plant and machinery that contribute to the building’s functioning as a whole which would include things like ventilation systems, security/electrical systems, heating machinery and lifts and elevators. The Treasury was responsive to the opinions voiced by many landlords and proceeded to give the green light to legislation being put in place to secure tax relief for property lessors.

How Much Relief Is A Corporation Entitled To?

The assets are split into two main classes:

  • Main plant and machinery
  • Special Rate – assets which are considered ‘long life’ or features which are integral

For Main plant and machinery, the capital allowance claim falls into 3 categories:

  • Super-deduction
  • AIA (max £1m)
  • Main pool

The super-deduction applies to new asset types and a 130% capital allowance rate applies. Effectively this entitles you to 24.7% of tax relief in year one.

The AIA (Annual Investment Allowances), which has been set at £1m per business up until 31 December 2021, is applicable to new and second-hand plant and machinery purchases. The capital allowance rate of 100% will apply with an effective tax relief benefit of 19% in year one.

The main pool applies to second-hand asset acquisition at runs at the normal capital allowance rate of 18%. This would effectively give you tax relief of 3.42% for the 1st year.

The Special Rate (generally Long-Life assets or integral features – lighting, air conditioning, power/generators) is also split in to three classes of capital allowance claims:

  • AIA (max £1m)
  • SR deduction
  • Pool

The AIA applies to all asset types (new and second hand) and a capital allowance rate of 100% applies – a 19% tax relief in year 1 effectively.

The SR deduction (special rate first-year allowance) applies to new assets at the capital allowance rate of 50% with a relief of 9.5% in year 1.

Pool claim - an effective relief of the cost in the 1st year of 1.14% and a capital allowance rate of 6%.

What Are The Limits On Investments Under Both The Super-Deduction Scheme And The Special Rate Allowance?

The government has not set a cap or limited how much investment can qualify for either of these. Acquiring plant and machinery would normally be placed in the 100% AIA pool for new assets, or 18% main pool for second-hand assets when a “Writing Down Allowance” (WDAs) is claimed but these business purchases are now eligible for the 130% super-deduction.

For most investments on new plant and machinery that would have qualified for 6% special rate writing-down allowances now will qualify for a first-year allowance of 50%.

To simplify, qualifying business purchases for firms can cut their taxes for up to 25p on the pound spent in plant and machinery.

Why Did The Government Introduce The Tax Allowances?

Due to Brexit and the very low levels of business stimulation, the UK is outperformed by many other global competitors. This really is a massive change to capital allowances which sees the net value of the UK's allowances in the area from 30th to 1st in the OECD (Organisation for Economic Co-operation and Development).

Are The Super-Deduction Tax Reliefs Really That Super?

You must keep in mind that these allowances are for companies only and that partnerships and sole traders and will not gain from the tax relief. Even then, the super-deduction scheme may not be the best option for your company. You will need to consider your forecasted profit and loss and seek advice from an expert to get the best benefit.

You should also be aware that the initial tax charge of 130% in conjunction with the 50% disposal value on FYA assets (energy/water-efficient) means that the taxable profits when the plant or machinery assets come to be sold will be increased.

If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 02037 282 848.

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