What is super deduction tax relief?
To enhance the investment in businesses, advance financial development, and support improvement in the wake of covid-19, the Chancellor has presented a super deduction tax rebate scheme.
The scheme aims to support the current level of business investment which has fallen due to covid-19. A huge gap in business productivity has been observed due to low business investment. Therefore, an increase in the capital allowance claims is being allowed to encourage business investment which will eventually promote economic growth.
How does the super deduction tax scheme work?
The super deduction tax scheme allows companies to claim a 130% capital allowance on qualifying plant and machinery spend from 1 April 2021 to 31 March 2023.
Under this scheme, for every £1,000 you invest in plant & machinery, you can claim £1,300 against your profits chargeable to corporation tax. With the corporation tax rate at 19%, this would result in a relief of £247.
For historical years, assuming that the annual investment allowance was not being claimed, the capital allowance would be restricted to 18% a year (if it is a main rate pool asset), resulting in a corporation tax relief of £34 (again at a corporation tax rate of 19%).
What are capital allowances?
Capital allowances are the alternate for the general accounting depreciation. Any asset which provides a long term tangible benefit can usually be considered to claim capital allowances.
For example, a business purchases plant and machinery worth £25,000 with a useful life of five years. The business may chose to depreciate the asset over five years at £5,000 per year until the asset is written off. However depreciation is not allowed for tax purposes and therefore needs to be added back into to taxable profits. However the business can claim capital allowances instead of depreciation.
What are the capital allowance rates and pools?
When claiming capital allowances, items are generally pooled into three groups as follows:
- Main rate pool – attracts a writing down allowance of 18% a year
- Special rate pool – attracts a writing down allowance of 6% a year
- Single asset pool – attracts a rate of 18% or 6% per annum depending upon the item
Assets on which super deduction scheme is applicable
Super deductions tax relief can be claimed on some of the following assets:
- Computer equipment and servers
- Tractors, lorries and vans
- Office desks and furniture
- Ladders, drills and cranes
- Electric vehicle charging points
- Refrigerators and compressors
- Fire alarm systems and close circuit CCTV systems
The above is not an comprehensive list however the equipment on which super deduction tax relief is to be claimed must be new. Details on the capital allowances and savings are set out in the table below:
|Asset type||Condition||Capital allowance claim type||Capital allowance rate||First year relief (19% CT)|
|Main rate pool (18%)||New||Super deduction||130%||24.7%|
|All||AIA (max £1m)||100%||19.0%|
|Special rate pool (6%)||New||Special rate||50%||9.5%|
|Used||Special rate pool||6%||1.1%|
|All||AIA (max £1m)||100%||19.0%|
ABC Limited spends £250,000 on qualifying plant and machinery in the main rate pool. What is the CA claim versus super deduction claim?
Without super deduction, claiming Annual investment allowance and CT rate at 19%
£250,000 x 100% (FYA) = £250,000 x 19% = £47,500
With super deduction and CT rate at 19%
£250,000 x 130% (FYA) = £325,000 x 19% = £61,750
Therefore the super deduction provides an additional tax savings of £14,250
How much super deduction tax can you claim?
For businesses that incur capital expenditure between 01 April 2021 and 31 March 2023, they can claim 130% capital allowances on qualifying assets. Super deduction includes all new plant and machinery that usually qualifies for the 18% main rate pool.
Can I claim super deduction tax relief on used assets?
No. Super deduction is not available for second hand plant and machinery.
What does not qualify for super deduction tax?
The following assets do not qualify for super deduction
- Used equipment
- Buildings and structures
- Company cars
How much can I invest in super deduction?
There is no minimum or maximum amount to the capital investment you can make into the super deduction scheme.
Can I claim super deduction on a company car?
Company cars do not qualify for this relief and they are specifically excluded. However from 01 April 2021, vehicles with CO2 emissions of 0g/km will still qualify for the 100% first year allowance.
How are disposals of the assets treated under the super deduction scheme?
HMRC have drafted additional rules regarding the treatment of disposals of the assets on which super deduction allowance was claimed. The treatment depends on the disposal date.
XYZ Ltd purchased machinery for £50,000 in the year ending 31st March 2022, which they disposed of in next accounting period to 31st March for £35,000.
XYZ Ltd would have claimed 130% on initial purchase cost of machinery (£50,000 x 130%), which is £65,000. This allowance would have saved XYZ Ltd tax of £12,350 (£65,000@19%).
In the year of disposal, the tax liability would be £8,645 (£35,000 x 130% x 19%), so this results in a net tax saving of £3,705 (£12,350 – £8,645) at the time of disposal.