Back at the start of 2020, when the global Covid-19 pandemic was just starting to affect all of our lives, few of us realised just how great the impact would be, or for how long that impact would be felt. Fast forward a year, and in the UK at least, we seem finally to be emerging from the worst of the pandemic, at least in terms of serious illness and mortality statistics. Inevitably, as vaccination targets are met, and the majority of the UK adult population becomes protected through vaccination, thoughts are now turning to the financial and business impact of the past year, and of the potential long-term consequences for the economy. It is with these issues in mind that the UK government has recently launched a raft of initiatives to boost British business, and help it to ‘build back, better’.

One of the most incentivising policy announcements to come out of this year’s Budget is the introduction of a ‘super deduction’ capital allowance. This is not simply a little tweak of existing capital allowance rules, but a very significant and very generous new tax break that could really help firms of all sizes get back on their feet and start thinking again about growth for their business.

The Super Deduction In A Nutshell

The new super deduction came into effect on April 1, 2021, and is set to remain in place until March 31, 2023. Essentially, it allows eligible companies to claim a 130% capital allowance on qualifying plant and machinery investments, as well as a 50% year one allowance on special rate assets that meet the eligibility criteria. This translates to a tax cut of up to 25p for every £1 invested, which is quite clearly enough to make most firms sit up and take notice.

This is not a scheme that is only open to large corporations, by any means. Any firm, whether a huge multinational or an SME niche operator, can claim the super deduction, provided that they pay corporation tax. Whether you are a specialist parts producer looking to invest in a laser cutting machine, for example, or a global automotive manufacturer considering a major investment in plant for a large-scale factory expansion, this scheme will undoubtedly offer significant tax savings. It promises to make the UK one of the world’s most competitive locations, when it comes to capital allowances.

By introducing such a generous capital allowance, the government is hoping to kick-start business investment, which has, in recent years, dropped to historically low levels, with the UK falling way behind its overseas competitors in terms of productivity and growth. Add in the Covid-19 pandemic, and it’s clear that the government needed to take decisive steps to stem this backwards tide.

How The Super Deduction Works

Capital allowances enable companies to offset the cost of eligible plant and machinery against their taxable income. Instead of using the existing writing down allowances (WDAs), which are currently set at 18%, companies can now claim a whopping 130% super deduction. Additionally, there is a first year allowance of 50% for qualifying plant and machinery which would previously have been eligible for a 6% special rate writing down allowance.

The types of plant and machinery covered by the super deduction are extensive, and can include machinery and equipment used within the firm’s principal operations, but also such things as computer equipment, solar panels, vehicles and so on.

tax super deduction example

As a worked example, let’s imagine a company investing £250,000 on new machinery. That company can claim the super deduction capital allowance on the entire £250,000 cost of the machinery, which makes £325,000. That means they can deduct £325,000 from their taxable profits. With the UK’s corporation tax rate currently set at 19%, that equates to a tax saving of £61,750.

When compared with the previous capital alliance system of Annual Investment Allowances (AIA) and Writing Down Allowances (WDA), the new super deduction could generate tax savings that are significantly greater, especially when the investment total is larger than the current AIA cap of £1 million.  With the super deduction capital allowance, there is no limit to the amount that can be offset against taxable profits.

Super Deduction Eligibility

Generally speaking, if you are a company that pays UK corporation tax, you are eligible to claim the super deduction on qualifying equipment purchases. Whilst the range of qualifying plant and machinery is broad and comprehensive, it does need to be purchased new, rather than second-hand or leased, and contracts need to have been signed after the start date for the scheme, which is April 1, 2021. Further guidance on specific eligibility criteria is available on HMRC’s website, and as always, advice should be sought from an accounting or finance professional before making investment decisions for your business.

Time To Look Forwards

As made clear by the government’s decision to introduce incredibly generous incentive schemes like the super deduction, now is the time for businesses of all sizes to take stock of their position following the pandemic, and to plan for growth going forwards. If your plans for business investment include staff as well as equipment, contact Cartisian today, to discuss how we could make your next recruitment campaign your most successful one to date.