Announcing it as “the biggest business tax cut in modern British history”, Chancellor Rishi Sunak introduced a new “super-deduction” tax policy in his spring budget, enabling tax paying businesses to lower their Corporation Tax bills. It certainly sounds like a wonderful thing, but what does it really mean, and how will it impact your business?
If you’re not an accountant (or perhaps even if you are!) this is a topic laden with jargon and some pretty complex ideas guaranteed to have a few scratching their heads. Here, we break it down and look at what the super-deduction is, how it works, and who might find it useful.
What is the super-deduction?
The super-deduction is a new type of capital allowance, which means companies can use it to claim tax relief on assets which in turn reduces their Corporation Tax. It’s a temporary measure, available from 1st April 2021 until 31 March 2023.
How do I work out the super-deduction?
Normally, companies can claim for assets at 100% of their value to get tax relief. So, if a company pays Corporation Tax (charged at a rate of 19%), the tax relief of an asset worth £10,000 is 19% of its full value, meaning the amount of tax relief would be £1,900.
19% of £10,000 = £1,900 of tax relief.
But the super deduction allows you to claim relief on 130% of the asset’s value. This means that for companies who pay Corporation Tax, the tax relief of an asset worth £10,000 would be calculated on 130% of its value.
130% of £10,000 = £13,000
This means companies will get a tax relief of £2,470, because 19% of £13,000 = £2,470
Without the super-deduction
With the super-deduction
Claiming tax relief on
100% of the asset’s value = £10,000
130% of the asset’s value = £13,000
Corporation Tax relief (at rate of 19%)
19% of £10,000 = £1,900
19% of £13,000 = £2,470
This means that the effective tax relief with the super-deduction is 25% because:
19% of 130% of the asset’s value = 25% of 100% of its value. Or near enough (24.97%).
It’s why the newspapers are saying that those paying Corporation Tax will receive 25p back for every pound spent on ‘qualifying’ plant and machinery assets.
Who is eligible for the super-deduction?
Any business which pays Corporation Tax is eligible for the super-deduction; sole traders and partnerships aren’t. It’s expected to be especially popular with those in the manufacturing, farming, or construction industries.
Why is it being introduced?
The UK has lower levels of business investment in comparison to that of similar countries which compete with the UK in export markets, resulting in decreasing productivity growth since 2008. The hope is these new measures will make Britain’s capital allowances system more competitive, and drive productivity back up.
Targeting businesses that have managed to save during the pandemic through reduced operating costs and government support, the government is hoping to encourage “an investment-led recovery”.
These tax incentives are designed to inspire companies to grow their business by making large, productivity-enhancing purchases now. Or as it has also been dubbed, the “splash out to help out” scheme. This would give the UK economy the post-pandemic boost it so desperately needs.
HMRC haven’t released a hard definition of “new and unused” plant and machinery. However, most tangible assets used during a business’s lifespan are considered plant and machinery for the purposes of claiming capital allowances.
So, whilst there is not an exhaustive list, qualifying assets can generally be defined as:
IT equipment and servers
Tractors, lorries, vans
Office chairs and desks
Electric vehicle charge points
What doesn’t qualify?
Cars, shares, or residential property do not qualify. You can’t make claims on assets purchased as part of a property unless you acquire the property brand new, and directly from the developer.
You must not have entered the contract to purchase the asset before
31 March 2021.
If you already have an umbrella agreement in place for lots of equipment and you’re drawing down equipment from that, it isn’t covered. Even if you see it as a new purchase, HMRC won’t!
What about second-hand or buy-to-rent assets?
The super-deduction only applies to new plant and machinery, not second-hand, nor can you use it for equipment you’re planning to offer for rent.
A machine that has been used for demonstration purposes or testing, such as test-driving a new van before purchase, are still ‘new and unused’ under HMRC’s definition.
Hire purchase finance and the super-deduction
HMRC have also confirmed that the super-deduction is available for equipment purchased via hire purchase finance, though only if ownership of the assets passes to the hirer.
It’s therefore essential to look at these on a case-by-case basis, and carefully review the agreement documents.
Assets acquired under finance lease type arrangements will continue to be ineligible for capital allowances, including the super-deduction. But remember, there are still other types of allowance that can provide relief for qualifying assets. We’ll explain those next.
What happens without the super-deduction?
You don’t have to claim the super-deduction, but can still choose to claim tax relief on your assets using other schemes.
The Annual Investment Allowance (AIA)
AIA, or Annual Investment Allowance to give its full title, allows you to claim the full cost of qualifying assets.
Claiming AIA in a nutshell
Claim 100% of the assets’ value.
The allowance available in a year is usually capped at £200,000.
As part of the COVID economic recovery, the cap has been temporarily increased to £1 million worth of assets, until 31 December 2021. There isn’t a cap on the super-deduction.
If the asset doesn’t qualify for AIA, then you can look to claim First Year Allowances.
What are first year allowances for assets?
Some assets – such as energy or resource efficient equipment like cars with low CO2 emissions – qualify for first year allowances (FYA).
Claiming first year allowances
Claim 100% of the assets’ value.
Doesn’t count towards the AIA limit.
Generally available for expenditure to improve energy efficiency.
50% first year allowance for special rate assets
There’s also a new type of first year allowance for special rate assets. The special rate pool essentially covers long-life assets, such as integral features like hot and cold-water systems within a commercial building.
Special rate items are normally only able to claim relief of 6%, but the new (albeit temporary) 50% FYA allows companies to claim (you’ve guessed it) 50% relief on special rate items.
The 50% first year allowance on special rate assets is available until
31st March 2023.
And finally, we come to writing down allowances.
What are writing down allowances?
Basically, the value of your assets reduces over time. Writing down allowances (WDA) allow you to claim against this depreciation, which effectively reduces profit and therefore your tax bill.
Claim writing down allowances
If the asset doesn’t qualify for first year allowances.
You’ve reached the Annual Investment Allowance (AIA) limit.
The asset isn’t eligible for AIA.
You can claim WDA on any amount above the Annual Investment Allowance (AIA). The items that you claim for are grouped into pools, depending on what they are.
Main pool assets have a rate of 18%: this includes plant and machinery that you use in the business.
Special rate pool assets have a rate of 6%: these are long life items, or the integral features of a building.
When isn’t the super-deduction so super?
Previously, qualifying assets would be placed in a pool, and written down each year by 18%. However, if you’re now claiming the super-deduction on an asset, you will need to identify each purchase individually to claim the 130% relief.
Good record keeping is essential here! This is because when you come to sell it, you must bring in 130% of the proceeds as a balancing charge.
By then, your Corporation Tax rate might also have risen to 25% in line with the government’s plans to increase it for some companies. This could present a significant unwinding and nasty claw back in subsequent years, so think about the impact of that on your cash flow.
You only really get relief on the difference between what you’ve paid and what you get when you sell it. Unless of course you scrap it.
The rising Corporation Tax rate
Conveniently the timeframe for the super-deduction sees it finishing the day before the Corporation Tax rate hikes up from 19% to 25% on 1st April 2023.
Earlier in the article we compared the tax relief available with the super-deduction and without it. With the super-deduction, companies can claim for 19% tax relief, on 130% of the asset’s value.
19% x 1.3 = 24.97. Pretty close to 25% wouldn’t you say?
It’s basically equivalent to claiming tax relief of 25% on 100% of the asset’s value. Which is exactly what companies will be able to do once the super-deduction ends, and Corporation Tax goes up.Going back to our example manufacturing company:
With the super-deduction, before Corporation Tax increases
Without the super-deduction, after Corporation Tax increases
Claiming tax relief on
130% of the assets value = £13,000
100% of the assets value = £10,000
Corporation Tax relief
19% of £13,000 = £2,470
25% of £10,000 = £2,500
If they invest that £10,000 after Corporation Tax rises in 2023, the tax relief available will only be £30 more than if they invest at the time of the super-deduction.
Essentially, you’re getting a first-year tax allowance on the new 25% Corporation Tax rate. Encouraging investment now means companies won’t be able to get both the super-deduction’s 30% enhancement up to 31st March 2023 and tax relief on that expenditure at 25%.
Will I save tax using the super-deduction?
Overall, this depends on your individual circumstances. Because assets are being treated individually rather than pooled, accelerating your expenditure if you don’t really need to right now – just to take advantage of the increased rate – could cost you more.
Lower end investments of £1 million per year or less would be better continuing with their current plans to avoid losing any profit. However, if you have expenditure that creates a loss before the tax rate change and carry that loss forward, and then go on to make a profit, you will see a benefit.
Invest now or later?
It is important to analyse the size of the investment against your financial plans and cash flows over the next few years to see if this is a viable option for your business. The size of the investment and the type of assets being purchased also need to be taken into consideration.
Remember, you don’t have to claim the super-deduction! It’s optional.
If your company is making a loss, or profits are low, you can assign them to your AIA. Claiming writing down allowances means you can tailor the claim to increase your taxable losses. For example:
Your company loses £60,000 in a year.
You have AIA qualifying expenditure of £100,000 in a year.
You can add these together, which will increase your taxable losses to £160,000.
Carry those losses into the next year and if you made £100,000 you can use the previous year’s £100,000 of qualifying expenditure to “null” your profit.
If you run a limited company, it would basically mean that no Corporation Tax would be due.
Where accountants can help
Your accountant will be (or should be!) well acquainted with your business plans and financial positioning. They’ll advise you on what capital allowances are available, including the super-deduction. An accountant will also understand how they can work together, and show you estimates for tax cash flows to see how it impacts the timings of any potential investment plans.
Crucially, they will help ensure you keep detailed records in order to know what expenditure you’re claiming against which allowance. This will become incredibly important when the time comes to sell your assets to prevent any headaches!
While this may seem like a tax giveaway, buyers beware! Don’t let the desire to pay less tax override your business plans. It’s crucial to remember that the cornerstone to any successful SME is cash flow.
Tax relief is only one aspect of cash flow management. Having access to reliable and up-to-date financials for your business will help you make the right decisions.
Using a cloud-based accounting system is the most convenient way to access real-time accounting information when you need it. It’s important that you only pursue investments when it’s commercially sound to do so. Don’t be tempted to veer off course just because this limited time offer sounds big, shiny and “super”!
Get a head start on planning
Super-deduction is a significant incentive to invest if your company is likely to be profitable from 1 April 2021. In the short-term it creates an opportunity to obtain tax relief on large development projects.
Given the limited lifespan of the tax break and the timings involved in decisions on plant and machinery expenditure, companies wishing to take advantage of the super-deduction should start planning now.