Announced earlier this year, the Super Deduction allows businesses to claim up to 130% capital allowance for qualifying new plant and machinery purchases.
To encourage businesses to make qualifying purchases quickly to boost the plant and equipment supply chain, firms with buying plans that include the purchase of plant and machinery assets in the next 10 months could save tax and improve cashflow.
However, with the Super Deduction ending in March 2023, there are some restrictions on the types of businesses and equipment that are eligible.
Firstly, what are capital allowances?
When you buy something that will be used by your business, capital allowances allow you to deduct some of the value from your profits.
This means your business could generate a corporate tax saving if it’s a limited company, or an income tax saving if it’s a partnership or sole trader.
There are now three types of capital allowance – Writing Down Allowance (WDA), Annual Investment Allowance (AIA) and now, the Super Deduction.
The basic capital allowance is the Writing Down Allowance (WDA) which allows you to deduct 18% of the asset cost each year over the asset’s lifetime, until you stop using it.
Annual Investment Allowances (AIA) are applicable to all business types but there is an expenditure limit of £1m, i.e. the first £1m of your plant and equipment investment during the qualification period of January to December 2021 will qualify, with a 100% allowance on both new and used plant and machinery.
And now, there is the Super Deduction.
What is the Super Deduction?
Firstly, the 130% first year allowance only applies to new plant and machinery, not used or pre-owned.
Only limited companies qualify which means only corporation tax savings can be made, not income tax for sole traders or partnerships and unlike the AIA, there are no expenditure limits.
As well as used or pre-owned assets being excluded, the same goes for cars and any assets that are to be hired out are also excluded.
The biggest difference with the Super Deduction is that the allowance is worth more than what you pay for an asset.
Timing it right…
The Super Deduction ends on 31 March 2023 and the basic rate of corporate tax is due to rise to 25% from April 2023.
The allowance can also be applied through a hire purchase (HP) agreement and businesses can get the Super Deduction as both a capital and interest allowance, meaning there may be an advantage of purchasing the asset through HP rather than cash.
For example, imagine if your business were to buy £100,000 of plant (including deposit) over a four-year HP agreement with monthly payments of £2,400 and interest of £3,800 per year, for a grand total of £115,200.
The Super Deduction applies in year 1, meaning that you would still get the corporation tax saving of £24,700, despite not paying £100,000 outright for the asset.
The Super Deduction will only be around for another year, so the timing spent on expenditure plans for plant and machinery is important.
We highly recommend talking to qualified accountant when making any investment decisions.