The “Superdeduction” was announced in the Budget on 3rd March, with the policy driver of encouraging businesses to invest now, rather than in two years’ time when the 25% Corporation Tax rate comes into force in 2023. The measure is as follows:
For qualifying expenditures incurred from 1 April 2021 up to and including 31 March 2023, companies can claim in the period of investment:
- A super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances.
- A first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
Does it only apply to limited companies?
In essence, yes. All SMEs who pay corporation tax are eligible for these tax breaks. Those excluded are partnerships such as lawyers or accountants and sole traders and any other businesses who do not pay corporation tax. A company’s size does not matter but companies who will benefit most will be large organisations who invest heavily in warehouse equipment, plant, and machinery. Farming and construction sectors will also expect to benefit.
However, it appears that Landlords wishing to invest in UK commercial property will not qualify for the “superdeduction”. After a year where revenues have been hard hit because of the pandemic, landlords would have appreciated being able to invest in abandoned retail units, restaurants, cafes, and other commercial premises and make them not only fit for occupation but as attractive propositions to draw back businesses to our beleaguered high streets.
What classes as qualifying expenditure?
Plant and machinery are the main category. For example, hardware qualifies but it appears that software does not and seems to be an oversight in terms of technology. We had thought that investment in electric vehicles would qualify, but it appears from a detailed read of the small print that this is not the case and potentially a missed opportunity to boost the green economy.
Here is a list of examples of plant and machinery that do qualify:
- Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Foundry equipment
- Electric scooters and bikes
And a shorter list of those assets which will not:
- Cars including electric cars.
- Leased assets
- 2nd hand assets
As you would expect, we have crunched some numbers:
If you do not exceed the Annual Investment Allowance (AIA) allowance of £1m
£10k investment, you would normally save tax at 19% so £1900. Now you will save 19% on 13k = £2470. Saving = £570 or 5.7% of the expenditure
If you are a big company exceeding £1m AIA allowance
You would normally receive 18% writing down allowances on expenditure of £100k, this would equate to £18k. Which is then taxed at 19%, giving you a saving of £3,420. Now with the super deduction that £100k you would be calculated at 130%, equating to £130k. Which is then taxed at 19%, giving you a saving of £24,700. Therefore, saving you £21,280. However, with this not coming into fruition until 1st April 2023 the tax rates will change to around 25%.
We therefore see it as good for big companies but not a game changer for smaller ones. If you are considering revising your investment plans in the light of the new “Superdeduction” do speak to us as there are other considerations such to how long you plan to hold the assets as you could be hit by a claw back on disposal proceeds at the higher rate of 25%.