How to boss the all new super-deduction


Constance Harris

This afternoon, The Chancellor of the Exchequer, Rishi Sunak announced that between 1 April 2021 and 31 March 2023, companies investing in ‘qualifying’ new plant and machinery will benefit from new first-year capital allowances.
Under this measure, investments in main-rate assets will be relieved by a 130% super-deduction, whilst investments in assets qualifying for special rate relief will benefit from a 50% first-year allowance.
 

HOW DOES SUPER-DEDUCTION WORK?

The Super-deduction is a brand-new development that takes the Annual Investment Allowance (AIA) one step further.  It allows you to deduct the value of your capital expenditure from your operating profits before you apply the tax percentage.
Therefore, the higher the expenditure on Capex, the lower the corporation tax you will pay.  However, the rate of 130% is an unprecedented move as it reduces your tax burden and effectively gives you a 25% reduction on your capital expenditure.
By not spending, your tax bill will be higher.  It is a move by the government to encourage companies to invest in the future and become more productive.
Accolade thinks a lot about interiors, so this example comes naturally: If I spend £1,000.00 on some new office furniture to accommodate social distancing, I will reduce my existing tax bill by up to £250.00.
“The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive.”
 

HOW TO CALCULATE THE SUPER-DEDUCTION?

James & Co Ltd is planning to make an operating profit of £100,000.00 at the end of their financial year and Alan James, the owner, is considering whether to make an investment of £10,000.00 on some new office partitioning to make it safe for the team to return to work.  He is weighing up the costs and benefits and wonders what effect it will have on his Corporation Tax Bill.  He compares the burden of tax if he does nothing vs. the burden of tax if he does sign the project off:
Option 1: Hang fire, keep working from home.
A straightforward calculation, Alan multiplies his projected operating profit of £100,000.00 by the current corporation tax rate of 19% which makes his burden of tax £19,000.00.
Option 2: Let’s get back to some normality
  1. In line with the new super-deduction law, Alan multiplies his £10,000.00 capital expenditure by 130% (thankfully it’s demountable so it qualifies as a main-rate asset) to generate the new tax reduction figure of £13,000.00.
  2. To calculate taxable profit, Alan reduces operating profits of £100,000.00 by capital expenditure figure of £13,000.00 to give £87,000.00 taxable profit.
  3. As before, he multiplies the taxable profit of £87,000.00 by 19% corporation tax rate which equals a £16,530.00 corporation tax burden to be paid.
Alan would reduce his tax burden to be paid to the government by £2,470.00.  This effectively makes Alan’s new partition 24.7% cheaper.
In looking after his employees’ well-being and boosting James & Co productivity, he could reduce his tax bill.

WHAT IS ELIGIBLE FOR SUPER-DEDUCTION?

‘Plant and machinery’ qualify for the super-deduction.  This includes items such as machines, equipment, furniture, certain fixtures, computers, cars, vans and similar equipment you use in your business.
The government divides plant and machinery into two categories:
Special-rate asset – Super-deduction rate of 50%.
  • parts of a building considered integral – known as ‘integral features’*
  • items with a long life
  • thermal insulation of buildings
  • cars with CO2 emissions over a certain threshold – check the threshold for your car, which depends on the car and when you bought it
 
Main-rate asset – Super-deduction rate of 130%
All ‘plant and machinery’** unless they’re in:
  • the special rate pool
  • a single asset pool (for example, because you have chosen to treat them as ‘short life’ assets or you’ve used them outside your business)
 
*Integral features include:
  • lifts, escalators and moving walkways
  • space and water heating systems
  • air-conditioning and air cooling systems
  • hot and cold water systems (but not toilet and kitchen facilities)
  • electrical systems, including lighting systems
  • external solar shading
 
**‘Plant & Machinery’ include:
  • items that you keep to use in your business
  • costs of demolishing plant and machinery
  • parts of a building considered integral, known as ‘integral features’
  • some fixtures, for example fitted kitchens or bathroom suites
  • alterations to a building to install other plant and machinery – this does not include repairs
Claim repairs as business expenses if you’re a sole trader or partner – deduct from your profits as a business cost if you’re a limited company.
For more detail, see the whole of the government’s capital allowance guidance.
Take care:
Certain assets, such as vehicles and leased plant and machinery, may be subject to restrictions so care should be taken.  This relief is not available for unincorporated businesses.
As you can see your interiors play a huge part in winning you back this money from the government, and we have compiled a simple table below with the interiors covered by the super deduction:
130% Super-Deduction
Demountable partitioning
Sound insulation
Fire and burglar alarms
Decoration
Non-structural suspended ceiling
Furniture
Kitchen & WC fittings
Appliances
Computers & IT
Audio visual equipment
50% Super-Deduction
Electrics
Plumbing
Structural work
Lifts
Air-conditioning & ventilation
Metal stud partitioning

Want to know more?