From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim the super-deduction.
What is the super-deduction?
The super-deduction is a 130% first-year capital allowance for qualifying plant and machinery assets. There is also a 50% first-year allowance for assets qualifying for the special rate pool. The super-deduction will allow companies to reduce their tax bill by up to 25p for every £1 they invest. This development has been hailed as exciting and innovative, with an emphasis on encouraging companies to invest in productivity-enhancing plant and machinery assets.
Why is the Government introducing a super-deduction?
As a result of the Covid-19 pandemic, which has caused chaos for businesses across all sectors, existing levels of economic investment have fallen, but the issue in fact stretch back further than the last 12 months.
Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.
Therefore, making capital allowances more generous works to stimulate business investment. As a result, these measures can promote economic growth and counter business cycles. The super-deduction will give companies a stronger incentive to make additional investments, bring their planned investments forward and deliver a much-needed boost to the UK economy.
Key facts to note for the 130% super-deduction
The super-deduction does not apply to:
- Cars – although it can be claimed on commercial vehicles.
- Assets leased out or to assets hired out (e.g. a hire fleet). However, in the construction industry, HMRC should accept that plant provided predominantly with an operative is more than just hire, and therefore is not excluded, so can qualify.
- Used or second-hand items.
Other points to consider:
- Any assets going into the special rate pool, such as integral features or long life assets, only qualify for a 50% super-deduction.
- Only companies qualify – not sole traders or partnerships.
- Only expenditure after 1 April 2021 is eligible, but if the contract is entered before Budget day (03.03.2021) then the company won’t qualify.
- If you sell the asset, you have to bring in 130% of the proceeds as a balancing charge.
Disposal of Assets
There are additional rules governing how proceeds are taxed for assets on which an allowance (130%) has been claimed. This calculation depends on the date on which a disposal takes place.
If this happens during an accounting period that commences before 1 April 2023, then the amount is determined as follows:
- The number of days before 1 April 2023 are divided by the total days in the account period
- That amount is multiplied by 0.3 and 1 is added to the result
In practice, this means that for periods that end on or before 31 March 2023, proceeds are taxed at 130% for the amount received. Periods that straddle 1 April will be subject to a hybrid rate. For periods starting on or after 1 April 2023, proceeds remain taxable at 100% of the proceeds received.
How can you help?
Relative Accountancy can help you decide if making the super deduction is the best way forward. It’s not always better to claim it – and in some instances you are better off claiming the annual investment allowances while they are still available, for example with integral features.
You should always allocate time to exploring the most tax efficient way to claim for allowances, even if they look straight forward.
Relative Accountancy is here to help if you need advice. Contact us by calling 01484 441431 or emailing hello@itsrelative.co.uk.