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Is it a bird? Is it a plane? No, it’s the new Super Deduction!

Paul Woodward

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Paul Woodward

In the Spring Budget 2021 it was announced that a new Super Deduction and first year allowance were to be launched to encourage business investment and spending, which had fallen during the COVID-19 pandemic.

These allowances make existing capital allowances more generous, and in this article, we discuss how they work and what qualifies.

Cut your tax bill by 25p for every £1 you invest

Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery can benefit from new first year capital allowances.

Under this measure companies are allowed to claim:

  • A super deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
  • A first year allowance (FYA) of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.

This upfront super deduction allows companies to cut their tax bill by up to 25p for every £1 they invest.

Both the super deduction and first year allowance therefore give businesses investing in qualifying equipment a much higher tax deduction in the tax year of purchase than they would have otherwise received.

It can also be used alongside AIA

Furthermore, these allowances are available alongside the ongoing Annual Investment Allowance (AIA) which provides 100% relief for costs of qualifying plant and machinery in the tax year of purchase.

The AIA expenditure limit was also previously extended to £1 million until 31 December 2021. Whilst the AIA is available on plant and machinery similar to the super deduction it can also be used on second-hand equipment and assets qualifying as special rate.

Who qualifies?

The super deduction and FYA are only available to companies subject to corporation tax, not individuals, unincorporated businesses, partnerships or LLPs.

What expenditure qualifies?

  • New and unused plant and machinery assets such as machinery, commercial vehicles, computer equipment, software, and furniture.
  • The contract for the plant and machinery (including fixtures installed under a construction contract) must have been entered into after 3 March 2021 and expenditure incurred after 1 April 2021.
  • There is no limit or cap on the amount of expenditure that qualifies.
  • It is not available for assets that will be leased or hired out, used or second-hand items. Cars are also excluded.
  • If the asset receiving the super deduction is later sold, the proceeds must be taxed at 130%.
  • If you buy assets in an accounting period which passes the end date of 31st March 2023, it must be pro-rated down depending on the length of accounting period falling after this date.

In summary

If you were thinking of making large capital purchases, now would be a good time to take maximum advantage of the super deduction.

It is only expected to be in place for the next 2 years, so planning your purchases or bringing forward expenditure should be considered in good time.

We are able to assist clients in their planning and applying these allowances. Please contact us to discuss your requirements.

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This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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