The super-deduction (or maybe not so super?)
Helen Fraser, Tax Adviser

A new super-deduction was announced by the Chancellor as part of the budget, but is it really so super?

The super-deduction was introduced on 1 April 2021 and will run until 31 March 2023. The new rules will benefit companies only investing in qualifying new plant and machinery. There are rules already in place offering 100% deduction on the first £1m of expenditure on the same items. Therefore, this is an extra 30% of deduction.

What is the tax saving for the super-deduction?

It works out for every £1 spent, the company’s tax bill will be reduced by 25p, instead of 19p currently.

  • Say £100,000 is spent on qualifying plant and machinery.
  • The amount to be relieved against taxable profits is £130,000 (£100,000 x 130%).
  • The tax relief is £24,700 (£130,000 x 19%).

The rate of the super-deduction will be time-apportioned if an accounting period straddles 1 April 2023.

What assets qualify for the super-deduction?

The relief applies to:

  • New and unused assets (i.e. not second-hand).
  • Must be used in a continuing trade (and not ring-fenced).
  • Cars are excluded.
  • Long-life assets are excluded (assets that are expected to last for at least 25 years).

Assets which would have previously been eligible for an 18% writing down allowance after the first £1m (in the main pool) will benefit from new first-year capital allowances and will be receive a 130% super-deduction.

Investments in assets which would have previously been eligible for a 6% special rate allowance, again after the first £1m (in the special rate pool) will benefit from a 50% first year allowance.  In reality, for investment in assets which qualify for the special rate pool (i.e. long-life assets, integral features), you are perhaps better off in claiming the old Annual Investment Allowance as this means you can claim 100% as a tax deduction.

What happens when I dispose of the asset?

There is a special rule if the super-deduction asset is disposed of prior to 31 March 2023, to take account of the extra allowances when you bought them. If you would like us to assist with this, please let us know.

What else do I need to know about the super-deduction?

  • There is no £ limit to what can be claimed under the super-deduction and the 50% first year allowance.
  • The Annual Investment Allowance still exists where a 100% allowance is given for £1,000,000 of investment in assets to 31 December 2021.  From 31 January, this limit falls to £200,000.
  • There are special rules for assets bought under a lease.
  • As we get closer to 1 April 2023, for accounting purposes, there is likely to be an increase in the deferred tax provision on the balance sheet as the rates are going up from 19% to a hybrid rate, the highest rate being 25% – this depends of whether annual profits are more than £50,000.
  • As you would expect, there are anti-avoidance rules for transactions between connected parties.
  • You can check further details from HMRC on the super-deduction here. 

Next steps

For further guidance please contact us and our specialist tax team will be happy to advise you.

 

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