What are Super-Deductions?

Most company business owners understand that if you incur a cost that is wholly and exclusively for the purpose of your trade, then it can be deducted from your taxable profits or added to tax losses.

Likewise, if companies invest in plant or other equipment that qualifies for tax relief, even though the expenditure is the acquisition of an asset – something that will be working in your business for years – it can be partly or wholly written off for tax purposes in the year it was acquired.

The facility that allows assets to be written off are called capital allowances and currently, they range from just a few percent per annum to a 100% write down. That was the case until Mr Sunak delivered his Budget last week…

Business owners have become accustomed to this writing off process and it had proved to be an incentive for companies to invest in new equipment.

But last week the Chancellor surprised us all by saying that companies investing in plant and machinery in the period from 1 April 2021 to 31 March 2023 will be able to benefit from enhanced capital allowances. These are:

  • Investments in assets that qualify for the main rate of capital allowances of 18% will benefit from a 130% first-year allowance. This means that for every £100 that you spend, you can deduct £130 in computing your taxable profits. This is equivalent to a tax saving of 24.7%. For example, if a company bought a new machine for its factory for £10,000 during April 2021, it could deduct £13,000 from its profits; at the present 19% rate of corporation tax this would save £2,470 in corporation tax. And so, for an expenditure of £10,000 the company would reduce its tax bill be £2,470, amounting to 24.7%.
  • In a further twist, investments in assets qualifying for special rate capital allowances benefit from a 50% first year allowance (although claiming the 100% annual investment allowance instead where this is available will be more beneficial).

If you are looking to invest in plant and machinery, it can be advantageous to do so within this window to benefit from the super-deduction. However, it is not available where contracts were agreed before Budget day.

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