To support the post-COVID-19 pandemic economic recovery, on 3 March 2021, The UK Chancellor, Rishi Sunak, announced the £25 billion tax break.
What is the Super-Deduction Tax Break?
To support the post-COVID-19 pandemic economic recovery, on 3 March 2021, The UK Chancellor, Rishi Sunak, announced the £25 billion tax break to boost business investment by providing a reduction of up to 25p for every pound of qualifying spending on plant and machinery. This Super Deduction aims to ensure the UK remains one of the most competitive markets.
What are the Specific Reasons the UK Government introduced it?
As mentioned above, the Super-Deduction tax break was developed to encourage business investment into the economy, helping promote the UK’s post-pandemic economic recovery.
Over the next two years, it is hoped that increased business spending will bring about better productivity levels within the UK, which will, in turn, lead to greater corporate profits for the government to tax in 2023.
The UK’s productivity gap with competitors could be linked to our historically low levels of business investment when compared to our markets. It is these low levels of investment which has played a large part in the slowdown of productivity growth since the 2008 Financial Crisis.
Since the pandemic began, previously low business investment levels have fallen even further: “with a reduction of 11.6% between Q3 2019 and Q3 2020”, according to the Treasury’s super-deduction fact sheet.
“Making capital allowances more generous works to stimulate business investment,” the Treasury clarifies.
“As a result, these measures can promote economic growth and counter business cycles…The super-deduction will give companies a strong incentive to make additional investments, and to bring planned investments forward.”
How Long will the Super-Deduction be available?
From 1 April 2021 until 31 March 2023, businesses looking to invest in new plant and machinery assets will be able to claim a 130% capital allowance deduction.
In combination with this deduction, you may be able to take advantage of a 50% first-year allowance (FYA) for qualified special rate (including long life) assets.
To help minimise your corporate tax burden, the 130% super-deduction and the 50% first-year allowance could help until the year 2023.
How does the new Super-Deduction work?
With this new tax relief being available for two years, despite it being a temporary measure, it could have a substantial impact on a large number of businesses and their infrastructure.
So, the best way to understand how the Super-Deduction works is by providing a practical example:
Imagine, as a business owner, you have spent £10,000 on relevant equipment and are eligible to claim the Super-Deduction tax break on these expenses.
To accurately calculate your taxable profits, you would first multiply your expenditure by 1.3 to reach 130% of your initial investment. This would take £10,000 to £13,000.
Following this, you will deduct £13,000 from your taxable profits – this could allow your business to save upwards of 19% of this amount. 19% of £13,000 would be £2,470.
This £2,470 would be how much corporation tax you would save if your business expenditure does qualify for the Super Deduction.
Keep in mind that this is a 130% deduction for investments which would normally qualify for 18% plant and machinery allowances. Alongside this, the first-year allowance of 50% on special rate pool expenditure would normally only attract 6% writing down allowances.
At Origin Finance, we believe that the best way to maximise your tax savings over the coming 2 years would be to plan, make realistic financial projections, and account for what level of expenditure you would need to effectively scale your business.
What has the Government defined as ‘qualified’ plant and machinery under the Super-Deduction?
Most tangible capital assets used within the course of everyday business are considered plant and machinery to claim capital allowances. Whilst there is not an exhaustive list of plant and machinery assets, the type of assets that qualify for either the mymedic.es Super-Deduction or the 50% First Year Allowance can include, but are not limited to:
- Computer Equipment and Servers;
- Electric Vehicle Charge Points;
- Office Chairs & Desks;
- Foundry Equipment;
- Ladders, Drills & Cranes;
- Refrigeration Units;
- Solar Panels;
- Tractors, Lorries & Vans.
Further details on the eligibility of different types of investments for different types of capital allowances can be found on pages 2 and 3 of the government factsheet. It is important to keep in mind that certain types of expenditure such as the acquisition of company cars are excluded. The government has promised to publish further guidance.
Can I claim Super-Deduction if I use Asset Finance?
Super-Deduction Legislation (published on 3 March 2021) states plant and machinery investment incurred under “a hire purchase or similar contract” have to fulfil “additional conditions” to be eligible for the super-deduction.
Some individuals are misled into believing that the tax break of 130% will exclude hiring purchase – or asset finance arrangements more broadly.
This is not necessarily the case, and in circumstances where your business is making payments to acquire an asset, and where there is intention and expectation to acquire legal ownership of the said asset at some point, you should be eligible for the Super-Deduction.
Make sure you are aware of any relevant anti-avoidance provisions that apply to, for example, contrived arrangements, agreements with connected parties, and second-hand assets.
There is also a clawback of the tax-saving if your business disposes of the asset before 1 April 2023.
If you would like more information about how a finance broker could help your business with the Super-Deduction, give Origin Finance a call on 01604 926 226 or visit our website