Super-Deduction

Here’s why you need to apply for the super-deduction (before it’s too late)

Contact Birkett & Co to see whether you can make the March 2023 deadline.

Six months from now, when people come up to you and ask, “What have you been doing? How did you manage to afford that?” you can point them in the direction of the super-deduction. While you can’t put a price tag on that feeling of getting something while you can, the UK government has clarified what can be deduced from it. The new super-deduction policy announced by the UK government in 2020 is a welcome relief for businesses across the country. But what is it, and how can it help you?

What you need to know about the super-deduction:
For expenditures incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments
Under the super-deduction, for every pound a company invests, its taxes are cut by up to 25p
This change makes the UK’s capital allowance regime more internationally competitive, lifting the net present value of our plant and machinery allowances from 30th in the OECD to 1st

Simply put, it’s an income tax deduction that goes above and beyond the standard deduction — and it’s available for a limited time only.

The super-deduction is aimed at stimulating economic activity and investment. This policy allows businesses to deduct an additional 30% of the cost of an asset making it one of the most generous deductions in recent years. It’s designed to encourage companies to invest in growing their business. As such, it will undoubtedly be welcomed by those looking to expand or invest in new projects. Especially when one considers just how much of a larger portion it allows them to deduct from their expenses.

The super-deduction is just part of the government’s broader economic recovery plan. Since then, we’ve seen more measures announced, such as the mini-budget in September 2022 (which you can read more about HERE).

Initially, it was one of four capital allowance offers:
The super-deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies
The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies
Annual Investment Allowance (AIA) — providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold until 31 December 2021
Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals, and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026

What are capital allowances in regard to the super-deduction?

The super-deduction is an enhanced version of the capital allowances scheme.

Capital allowances are tax reliefs that let businesses write off the cost of assets against their taxable income. This relief is available on various purchases, including plant and machinery, fixtures and fittings, and office equipment. The allowance amount depends on the type of asset and when the business first used it.

For example, plant and machinery allowance is typically available at 18% per year for the first five years, while it is 6% for special rate items such as integral fixtures and fittings.

However, the super-deduction is an enhanced version of the capital allowances scheme. Under this new scheme, businesses can claim a 130% deduction on the cost of newly acquired plant and machinery in the first year. Therefore, a company investing £1 million in new plant and machinery could reduce its taxable profits by £1,300,000. In translating its accounting profits into taxable profits, a business is required to ‘add back’ any depreciation. However, it can instead deduct capital allowances.

For example, a corporation tax-paying company with accounting profits of £1,000, depreciation expense of £200 and total capital allowance claims of £300 would make the following adjustment:

? | Add £200 (depreciation expense) to £1,000 (accounting profits) = £1,200

? | Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits)

? | Apply the appropriate tax rate, e.g. corporation tax at 19%: £900 x 19% = £171

What is plant and machinery and what qualifies for the super-deduction?

There is not an exhaustive list of plant and machinery assets but we have noted some below.

Plant and machinery are businesses’ most common types of tangible capital assets. They are essential for carrying out the business’s day-to-day operations, including items such as machinery, equipment, vehicles and tools. The cost of plant and machinery can be significant, so companies must consider which assets they need to operate effectively. There are several factors to consider when making this decision, including the asset’s expected life, its maintenance costs and whether it will be used for multiple purposes.

There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for either the super-deduction or the 50% FYA include, but are not limited to:

More detail on the eligibility of different types of investments for different types of capital allowances is set out in the table below.

	Plant & Machinery						Structures & Buildings
	Bought new	Bought 2nd – hand	Assets held for leasing	Main rate assets	Special rate assets	New disposal rules	Structures & Buildings
Super-deduction (130% FYA)	✅			✅		✅	N/A
Special Rate FYA (50% FYA)	✅				✅	✅	N/A
Annual Investment Allowance (100% up to £1m)	✅	✅	✅	✅	✅		N/A
Writing down allowances (18%)	✅	✅	✅	✅			N/A
Writing down allowances (6%)	✅	✅	✅		✅		N/A
Freeports (100% ECA, uncapped)	✅			✅	✅		N/A
Structures & Buildings Allowance (3% pa)	N/A						✅
Freeports (SBA 10% pa)	N/A						✅

An example of the super-deduction in practice

PREVIOUS SYSTEM

A company spends £10m on qualifying assets

The same company spends £10m on qualifying assets

Deducts £1m using the AIA in year 1, leaving £9m

Deducts £13m using the super-deduction in year 1

WITH SUPER-DEDUCTION

Deducts £1.62m using WDAs at 18%
(with the remaining £7,380,000 carried forward to the following years)

Deductions total £2.62m — and a tax saving of 19% x £2.62m = £497,800

Receives a tax saving of 19% x £13m = £2.47m

The new Capital Allowances offer

The super-deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies
The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies
Annual Investment Allowance (AIA) — providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold until 31 December 2021. This was due to reduce to £200,000; however, it’s the threshold has been extended to 31 March 2023.
Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals, and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026

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