One of the most striking additions to the March 2021’s Budget Announcement was the introduction of a new “Super Deduction” which offers a 130% writing down allowance on qualifying investments.  Although this was heralded as the “biggest business tax cut in British history”, do the headlines translate to big tax savings?

What reliefs are currently available to businesses?

Currently, all businesses – sole traders and companies – benefit from tax relief for investments in plant and machinery used for the purposes of trade.  Plant and machinery includes obvious items such as a printing press, computers and fork lift trucks but also extends to company cars and the heating system/air conditioning of the workplace.

Tax relief is awarded via writing down allowances which allow 18% or 6% relief, depending on the type of items purchased.

Businesses also benefit from an Annual Investment Allowance (AIA) and First Year Allowances (FYA) which offer 100% tax relief on qualifying expenditure.

The AIA is available on all expenditure (except cars) and the standard value of the allowance is £200,000, however, the AIA was temporarily increased to £1 million for acquisitions made between 1 January 2019 to 31 December 2021 (restrictions may apply if an accounting period straddles these dates).  The amount of investment on FYA’s is not limited, however, this relief is broadly restricted to acquisitions of new, environmentally-friendly plant and machinery.

The AIA and FYA offer full reductions in profits chargeable to tax.

What is the Super Deduction?  How does it differ from current rules?

Whilst AIA and FYA offer 100% tax relief on investments in plant and machinery, the new Super Deduction will offer 130% tax relief for qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023.

Qualifying expenditure only includes plant and machinery which would be eligible for the “main rate pool” and not for special rate (which generally applies to long life assets) items which would ordinarily only receive writing down allowances at 6%.

The Super Deduction represents the government’s £25 billion investment and, in theory, 130% relief, combined with the current corporation tax of 19%, means that for every £100,000 you spend, you get £24,700 back in tax reductions.

There is also a second relief which permits a 50% first year allowance (FYA) broadly for special pool eligible expenditure.

What’s the catch?

On the face of it the Super Deduction is a welcome tax relief to encourage and incentivise business investment.  However, tax is never quite this straightforward and it is important to remember the Super Deduction is not available:

  • To sole traders or partnerships;
  • On cars
  • On second-hand plant and machinery;
  • Items which will be leased

There are also significant clawback rules on investment which qualified for the Super Deduction – these items will not be pooled like other capital allowance claims and companies could be hit with large balancing charges if they sell the items in later years.

The Super Deduction goes hand in hand with the announced increase in Corporation Tax from 19% to 25% on 1 April 2023 (with small rate exceptions) and is aimed at boosting capital growth despite looming corporation tax increases.  The increase in corporation tax means any benefits from the Super Deduction could be nullified, especially for those investing less than £1m.  The 130% relief is broadly equivalent to the new 25% Corporation Tax rate, and it is the government’s way of encouraging companies to spend our way out of a COVID-19 recession!

Tax relief on plant and machinery expenditure is complex.  We recommend that any companies wishing to make use of the new deduction take advice before investing as there are a range of other reliefs available, which may be more suitable for your business.