The Finance Act 2021 introduced a new 130% first-year allowance (super-deduction) for certain types of capital purchases, made between 1 April 2021 and 1 April 2023. Companies looking to benefit from this tax relief should be aware of the types of assets that qualify, as well as some of the potential pitfalls.
What is the super-deduction?
The super-deduction is a new tax relief measure designed to incentivise companies to invest in capital assets. It offers an increased deduction from taxable profits.
For example, a company investing £100,000 in new machinery after 1 April 2021 can save £24,700 of corporation tax with the super-deduction; with the Annual Investment Allowance (AIA), the saving is just £19,000.
The super-deduction is only available to entities subject to corporation tax, so sole traders and partnerships are excluded. Unlike the AIA, there are no limits on super-deduction claims in any given year.
In most cases, anything that would otherwise qualify for capital allowances (such as main pool plant & machinery) will be eligible for the super-deduction. Common examples of main pool plant and machinery include computer equipment, CCTV, production machinery or tools purchased for use in a trade.
However, there are few exclusions to keep in mind, including expenditure on:
- used or second-hand assets
- contracts entered into prior to 3 March 2021
- assets used for leasing (although there are exceptions to this)
- motor vehicles – for the first-year allowances available for electric company cars, see our Tax Summary
What about special rate pool expenditure?
While special rate pool additions do not qualify for the super-deduction, there is a new relief known as the ‘SR Allowance’ available for these purchases. The SR Allowance is a 50% first-year allowance.
Examples of assets qualifying as special rate pool include electrical systems, hot and cold-water systems, lifts, and thermal insulation for buildings. Special rate pool items would usually qualify for the AIA at 100%, so it would likely be more beneficial to continue claiming the AIA as long as the expenditure is within the limit (currently £1 million per annum).
Are there any potential drawbacks to claiming the super-deduction?
The short answer is yes: the super-deduction may not always be the most tax-efficient option. The new legislation contains provisions for claw-back of the relief when the capital asset is subsequently sold, as the disposal proceeds must be added back to taxable profits rather than deducted from the main pool brought forward balance.
The effective corporation tax saving from the super-deduction is at 24.7% – however, if the asset is sold following 1 April 2023 the proceeds will effectively be taxed at 25% unless the small-profits rate applies. If the company disposes of the asset prior to 1 April 2023, the disposal proceeds also need to be multiplied by 1.3.
The rules operate similarly for the SR allowance, where a proportion of the proceeds must be calculated and treated as taxable income. Companies anticipating that they will only retain an asset for a short time, therefore, may wish to opt for the AIA instead.
If you have any questions about the super-deduction, or need help with any other capital allowance queries, please don’t hesitate to contact our team for advice at email@example.com.