Guide

A guide to the Capital Allowances super deduction in the UK

Gateley Capitus

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What is the capital allowances super deduction?

Capital allowances are UK tax relief for investment in business equipment (called “plant and machinery” in tax jargon). The super-deduction gives a bigger and faster capital allowances tax break than has ever been given by capital allowances before.

The super-deduction was introduced in the spring 2021 Budget. It is a temporary measure to boost the UK economy by encouraging investment in business equipment during the two years from 1 April 2021 to 31 March 2023, where the contract to buy the equipment was also agreed on or after the Budget day of 3 March 2021.

Who qualifies for the capital allowances super deduction?

There are several boxes that need to be ticked to claim the super-deduction. Some of the most important are:

Companies – Only companies can claim the super-deduction. The super-deduction is not available to other business types including individuals (i.e. sole traders), partnerships or limited liability partnerships (LLPs).

Main pool plant and machinery - The super-deduction is only available for “main pool” (sometimes called general pool) plant and machinery. This includes most business equipment and vehicles (but not cars), as well as many commonplace “fixtures” in properties, such as carpets, fittings and furnishings, sanitary appliances and fire alarms. The super-deduction is not available for other “special rate pool” plant and machinery fixtures, which include electrical power and lighting, hot and cold water, heating, ventilation, air conditioning, lifts and solar panels.

New and unused plant and machinery – The assets must be new and unused. So, the super-deduction is not available to buy second-hand plant or machinery, such as fixtures that form part of purchased freehold commercial property.

Can a landlord claim the super-deduction?

Initially, the super-deduction small print prevented landlords from claiming the super-deduction. But the Government listened to calls from business to change this and changed the rules so landlords can now claim the super-deduction for “background plant and machinery for a building”. This means that normal plant or machinery, that would be found in many types of building and without which a building could not generally be used, now qualifies for the super-deduction. The cost of assets in the common parts of multi-let properties also benefit from the super-deduction.

How much can be claimed under the super deduction?

The super-deduction gives a tax write-off that is 130% of the item’s cost. Or put another way, the tax deduction is 30% greater than the money spent.

Example

A company paying the 19% rate of corporation tax makes a £100,000 investment in main pool plant or machinery. Claiming the super-deduction gives the company a £130,000 tax deduction (that is, £100,000 x 130%). This saves the company tax of £24,700 (that is, £130,000 x 19%).

So, every £1 of spend on equipment qualifying for the super-deduction is worth a tax saving of nearly 25p.

How do losses impact the super deduction?

Surprisingly, even companies with losses can potentially benefit from the super-deduction. Whilst there may be no immediate benefit because a loss-making company will not have a corporation tax bill, claiming the super-deduction can increase the amount of tax losses available or even turn an accounting profit into a loss for tax purposes. There are complicated rules about how a company’s tax losses may be used. But they can potentially be offset against the company’s profits of another accounting year (potentially after April 2023 when the corporation tax rate is expected to increase to 25%, giving a tax saving of almost 33p in the pound). Or for companies that are part of a group, losses can normally be transferred to other group companies to be relieved against their profits of the same year or later years.

Is there a cap on the super deduction?

There is no limit to the amount of spend that can benefit from the 130% super-deduction. This is different from the super-deduction’s nearest capital allowances equivalent, the 100% “annual investment allowance” (AIA), which has a maximum cap of £1,000,000 of qualifying spend each year and will reduce to just £200,000 from 1 April 2023.

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