How to make the most of the tax "super-deduction"
As policies go, we’ve got to hand it to The Treasury: “super-deduction” sounds pretty cool. Name aside, this incentive is a cash-friendly way for small business owners to invest in the equipment and machinery they need to grow.
When Rishi Sunak announced the super-deduction in his Budget, he said: “We need to do even more to encourage businesses to invest right now”. As such, it’s a tool designed to boost business investment and productivity that will (hopefully) contribute to a stronger economic recovery.
Essentially, over the next two years you can claim back up to 25p for every £1 you invest in machinery or equipment (subject to conditions). Let’s take a look at exactly how it works and what kinds of businesses it’s best for.
According to the Treasury, business investment has fallen by 11.6% over the pandemic. By offering businesses this boost, they’re hoping to incentivise higher levels of investment. The idea is that this will spur innovation and help to increase productivity over the next few years. That in turn will lead to higher company profits, which HMRC is then able to tax.
Thanks partly to the tax break, Oxford Economics analysts have forecasted UK investment to be much higher than other G7 countries. Coupled with funding opportunities like the Recovery Loan Scheme, British businesses are in a strong position to rebuild and recover. The Bank of England has already seen spending in buildings and transport pick up as Brexit has become a reality and restrictions continue to lift.
The super-deduction gives businesses that invest in qualifying machinery and equipment a 130% tax deduction on the price paid, the year they buy them. What this means in reality is that your company can claim up to 25p back for every £1 you spend on equipment. It’s valid on purchases made from 1 April 2021 until 31 March 2023.
You make the claim when you pay corporation tax on your taxable income at the end of the tax year. The tax break is available alongside the existing Annual Investment Allowance (AIA), which gives 100% relief for machinery and equipment in the first year of purchase. It’s set at £1 million per business this year. However, unlike the AIA, the super-deduction has no cash limit on how much you can invest in these assets.
The table below shows the various capital allowances (CA) claims you can make. These things together could significantly reduce your corporation tax bills until 2023.
The super-deduction is only available to companies that pay corporation tax. That means that individuals, partnerships and LLPs aren’t eligible, unfortunately. It also only applies to contracts for equipment or machinery that you entered into after 3 March 2021 when the tax break was announced, so long as you paid after 1 April this year.
Generally, this incentive is for purchases you make in full. However, machinery or equipment paid for using asset finance or hire purchase can count under the super-deduction if they meet “additional conditions”. Essentially, if the expectation is that your company will eventually legally own the asset outright then the super-deduction should be available.
A word of caution on leased equipment: make sure you’re aware of anti tax-avoidance rules that apply to agreements with connected parties or second-hand purchases. It’s also important to note that if you get rid of the asset you claim the super-deduction on before 1 April 2023, you’ll need to pay back the money you save in tax.
If your business meets the eligibility criteria in the section above then you’ll want to know what assets the super-deduction applies to. The Treasury has stated that “most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances”. With such a broad answer, most businesses should be able to use it. Some assets won’t be covered of course, such as company cars for example.
Here’s a list of assets the super-deduction can apply to, according to the Treasury:
- Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Foundry equipment
The super-deduction is a neat way to save on your corporation tax bill over the next two years. It’s a clear incentive for businesses of all sizes to invest in the equipment and machinery they need to recover and thrive. Take a look at the Treasury’s super-deduction fact sheet to help you decide how to take advantage of the tax break.
If you need additional funding to support those much needed investments and build a meaningful recovery, the Recovery Loan Scheme could offer you a fast and effective way of managing the one-off costs.