In the Spring Budget, the government announced an attractive new company tax relief in order to stimulate the economy by encouraging capital investment. This super-deduction
is a temporary allowance, which is in place for the next two years.
The new relief is only available to limited companies to set against corporation tax. Unfortunately, individuals, partnerships and LLPs cannot benefit from the relief.
How does it work?
For qualifying expenditure between 1 April 2021 and 31 March 2023 taxable profits are reduced by 130% of the qualifying spend; for every £100 spent on qualifying plant, £130 can be claimed against taxable profits.
Based on the current corporation tax rate of 19%, for every qualifying pound a company invests, a tax saving can be made of up to 25p.
This is the first time there has been a capital allowance relief above 100% and it has no upper investment limit!
What assets qualify for the Super-deduction?
Most new plant and machinery will qualify for the super-deduction, but it must be new and unused. Second hand assets won’t qualify, however businesses will still be able to claim the existing Annual Investment Allowance relief of 100% on expenditure up to £1m until 1 January 2022, when this limit falls to £200k.
Cars have been specifically excluded from the super-deduction, although vans will qualify.
If cash flow is a concern, there is no requirement to fully pay for the assets up front. Purchases made using hire purchase agreements still qualify.
It is essential to keep good records of any assets purchased, firstly in order to initially qualify for the super-deduction, secondly because if any of these assets are subsequently sold before the 31 March 2023 there are special disposal rules to follow.
With all capital investments, it is not just the tax savings to be considered. the main aim should be to increase your company’s profitability. Companies may wish to bring forward planned investment in order to benefit from the super-deduction. However, with the rate of corporation tax increasing to 25% from 1 April 2023, bringing investment forward to utilise the super-deduction may not always generate the highest tax saving.
It is always best to seek advice from your tax advisor in advance of any investment. They will be able to advise if the specific assets you are planning to purchase qualify for the anticipated relief and can assist with planning the best timing of the purchase for your business.