When looking to grow, companies need as much financial support as possible to help cover expansion costs and increase cash flow. This is where the new super deduction allowance can make a significant difference to the overall tax liability of an enterprise, enabling investment at a time when business owners remain understandably cautious in the wake of the pandemic.
In this guide, we look at what the super deduction allowance is, how this works, who qualifies and how to claim it.
What is the super deduction allowance?
The super deduction allowance is one of two new temporary capital allowances introduced last year to encourage meaningful investment and to support company growth in the UK. In a bid to boost economic recovery following the impact of the COVID-19 pandemic, the super deduction allowance, together with a special rate allowance, represents some of the most attractive tax incentives for business investment ever offered by the UK government. These also make the UK’s capital allowance regime much more internationally competitive.
Capital allowances enable businesses to write off the cost of certain capital assets against taxable profits, taking the place of commercial depreciation, which is not normally tax-deductible. Broadly speaking, capital allowances can be claimed when assets are bought and kept to be used in a business, where some or all of the value of those assets can be deducted.
The super deduction and special rate measures are types of first year capital allowances, permitting companies to deduct a percentage rate of the cost of qualifying capital expenditure made during the year that the expenditure was first incurred. However, the rates for the two new temporary allowances are especially generous: with an enormous 130% first year capital allowance for investments in main rate assets, which would ordinarily qualify for the 18% main pool rate of writing down allowances (WDAs), and a 50% first year allowance for qualifying special rate assets, which would normally only attract the 6% special rate of WDAs.
Together, the 130% super deduction and 50% special rate allowance will allow investing enterprises to significantly lower their tax bills, for example, the super deduction means that businesses can save up to 25 pence for every pound invested. In this way, these allowances will give businesses a strong incentive to make additional investments and to bring any planned investments forward. These measures are specifically aimed at stimulating investment in productivity-enhancing plant and machinery that will help a business grow, and to make those investments now, rather than delaying spending until a future date.
How does the super deduction allowance work?
In translating accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation, but can instead deduct any capital allowances. However, the super deduction allowance gives businesses investing in qualifying assets a much greater deduction in corporation tax than would otherwise normally occur. Under the super deduction allowance rules, for expenditure incurred between 1 April 2021 to 31 March 2023, companies can claim 130% first year relief on qualifying capital investments.
Applying the super deduction rule in practice means that a company incurring £1m of qualifying expenditure can deduct a huge £1.3m (130% of the initial investment) in computing its taxable profits. Deducting £1.3m from taxable profits will save the company up to 19% of that, or £247,000, on its corporation tax bill.
The following illustration helps to compare the previous system to the new rules, prior to the introduction of the new temporary super deduction allowance:
With the super deduction allowance
- A company spends £10m on qualifying capital assets
- It deducts £13m using the super deduction allowance in year 1
- It receives a tax saving of £13m x 19% = £2.47m.
Without the super deduction allowance
- The same company spends £10m on qualifying capital assets
- It deducts £1m using the Annual Investment Allowance (AIA) in year 1, leaving £9m
- It deducts £1.62m using WDAs at 18%
- Its deductions total £2.62m, with a tax saving of £2.62m x 19% = £497,800.
The AIA is an existing capital allowance providing 100% relief for the cost of qualifying plant and machinery in the tax year of purchase. This allows a business to deduct the full value of an asset that qualifies for AIA from its profits before tax, up to the annual threshold. Together with the other measures introduced in a bid to boost the UK economy, the AIA threshold has been permanently set at £1million per year.
Who qualifies for the super deduction allowance?
For expenditure to qualify for the temporary super deduction allowance, a number of requirements must first be met, including:
- the expenditure must be incurred either on or after 1 April 2021 but before 1 April 2023
- the expenditure must be incurred by a company subject to corporation tax
- the plant or machinery purchased must be unused and not second-hand
- the expenditure must not fall within any of the general exclusions for first year allowances.
The super deduction is therefore only available to companies liable to corporation tax, not individuals, partnerships or LLPs who are liable to income tax. Unincorporated businesses who are ineligible for the super deduction can instead claim the full cost of expenditure through the AIA, up to the £1 million limit. The super deduction also only applies to the purchase of new plant and machinery, although the AIA can again be used to cover the purchase of any second-hand capital assets up to the increased threshold.
When it comes to those assets that are excluded under the super deduction rules, reference should be made to the general exclusions for all first year allowances. These include exclusions for expenditure on cars and on the provision of plant and machinery for leasing.
What is super deduction qualifying expenditure?
Most tangible capital assets used in the course of a business will be considered plant and machinery when claiming capital allowances, where there is no exhaustive list here. Plant and machinery are essentially tools of the trade, kept permanently for business use, although what counts as plant and machinery will depend on the nature of that business.
The kinds of assets which may qualify for the super deduction include things like office equipment, warehousing equipment, construction equipment, machines and certain fixtures. This could include computers and printers, office chairs and desks, tools and specialist machinery, forklift trucks and pallet trucks, as well as kitchen or bathroom fittings and fire alarm systems. Plant and equipment can also include vans, lorries and tractors.
There are special rules for cars when claiming capital allowances. Equally, any plant and machinery that is classed as special rate expenditure will not qualify for the super deduction. This means, for example, integral features such as lifts and escalators, or water and heating systems, are not eligible for the super deduction but may qualify for the special rate allowance.
How is the super deduction allowance claimed?
The super deduction allowance is claimed in the same way as other first year allowances, where the company tax return must include a separate capital allowances calculation. The amount that can be claimed is then deducted from the taxable profits.
A claim for the super deduction allowance must be made in the accounting period when the capital expenditure was incurred, which must have been on or after 1 April 2021 but before 1 April 2023. The normal rule is that expenditure is classed as being incurred as soon as there is an unconditional obligation to pay it, except where there is an interval of more than 4 months between the date on which the obligation to pay becomes unconditional and the date on which payment is due. If the interval is more than 4 months, the expenditure is not classed as being incurred until the date on which payment must be made.
For example, if a company purchases some new machinery for £15,000 where, under the contract, it must pay £7,500 on delivery (18 May) and £7,500 one month later (18 June), the obligation to pay for that equipment becomes unconditional on delivery, even though it is legally required to pay for the machine in two instalments. Further, as both payments are required to be made 4 months or less after the date on which the obligation to pay becomes unconditional, the second payment falling due on 18 June, the company is classed as incurring expenditure of £15,000 on 18 May for the purposes of claiming the super deduction.
However, for any expenditure incurred as a result of a contract entered into before 3 March 2021, this will be treated as incurred when the contract was entered into for the purposes of determining whether expenditure is qualifying super deduction expenditure, even if an unconditional obligation to pay arose after this date. For example, if a company entered into a contract to buy some office equipment on 1 February 2021, and the unconditional obligation to pay arose on 1 April 2021, this expenditure will not qualify for the 130% deduction.
What is the super deduction at the relevant percentage?
If super deduction expenditure is incurred within the relevant timeframe but in a chargeable period ending on or after 1 April 2023, the rules provide for a reduced deduction of less than 130%. This is known as the ‘relevant percentage’. To arrive at the ‘relevant percentage’, the following simple mathematical calculation will need to be applied:
- Count the number of days in the accounting period prior to 1 April 2023
- Divide that number by the total number of days in that period
- Multiply this by 30
- Add 100 to this result to get the relevant percentage
- Multiply the qualifying super deduction expenditure by the relevant percentage.
For example, where a company has a calendar year accounting period ending 31 December 2023, and a super deduction expenditure of £10,000 is incurred on 1 February 2023, the company will not be entitled to claim a super deduction of £13,000, but will still be entitled to claim £10,740. Applying the above formula, the number of days in the relevant period before 1 April 2023 is 90, within a total accounting period of 365 days. The calculation for the relevant percentage is therefore 30 × (90 days ÷ 365 days) + 100 = 107.40%. If a company’s accounting period ends before 1 April 2023, the rate of super deduction will be the maximum 130%.
How does the special rate allowance work?
The special rate allowance provides companies with a 50% first year allowance for special rate assets until 31 March 2023. The special rate allowance is subject to the same conditions that must be met for the super deduction allowance — where the special rate allowance is not available to individuals, partnerships or LLPs, and cannot be used for second-hand assets purchased by a company — but applies only to special rate expenditure rather than main rate expenditure. This includes things like integral features, long life assets and thermal insulation.
For example, on 1 December 2021, a company spends £10,000 on a heating system for installation at its business premises and use in its business. In the accounting period ending 31 December 2021, they can therefore claim the 50% special rate first year allowance which equals £5,000 for this expenditure. The remaining balance of expenditure, after deducting the special rate first year allowance, is £5,000, which may be added to the special rate pool in the following accounting period and a 6% WDA can be claimed in respect of this figure.
As with the super deduction, where the AIA can be used for assets that do not qualify under the super deduction rules, the AIA can also be applied to purchases of special rate plant and machinery that attract relief at the lower rate of 50%. The balance of any unused expenditure can then be added to the special rate pool in the following accounting period to claim WDAs.
For technical guidance on the super deduction rules, reference should be made to the HRMC capital allowances manual at GOV.UK (CA23161). However, to maximise the benefits of this temporary new measure and make the most of this limited window of opportunity to finance corporate growth, expert advice should be sought from a tax specialist.
Super deduction FAQs
What is the super deduction tax?
Super deduction is a capital allowance for expenditure incurred between 1 April 2021 to 31 March 2023, where companies can claim 130% first year relief on qualifying capital investments, in this way encouraging investment in the wake of the pandemic.
What qualifies for the super deduction?
Only companies qualify for the super deduction allowance, although sole traders and partnerships will instead be able to use the Annual Investment Allowance (AIA) to deduct capital expenditure.
What is the 130% capital allowance?
The 130% allowance is a temporary capital allowance for companies based in the UK, allowing them to significantly lower their corporation tax bills by deducting 130% of qualifying expenditure on capital assets between 1 April 2021 to 31 March 2023.
What does 130% tax relief mean?
In 2021, the UK government introduced its best ever tax incentive for companies in the form of a 130% capital allowance on the purchase of main rate assets, alongside a new 50% first year allowance for qualifying special rate assets.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.