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Rough guide to the super-deduction tax break

17 May 2021

The pandemic has already created a great need for capital investment as companies seek to rapidly re-tool their logistics operations. For those companies on the fence about such investments, the Government has unveiled an additional kicker - the ‘super-deduction’ tax break. See here for how it works alongside other relevant tax measures.

HANDLING & STORAGE SOLUTIONS magazine asks if it is the right time to invest in equipment, as the Government has introduced a new tax break relating to capital purchases, which results in a big jump in tax savings. For example, under the new system a company spending £10m on qualifying assets woud see tax savings jump from £497,800 to £2.47m.

WHAT HAS BEEN ANNOUNCED?

Four capital allowance measures were announced in the Budget:

• The super-deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments.

• The 50% first-year allowance (FYA) for special rate (including long life) assets.

• Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold.

• 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.

WHAT ARE THEY EXACTLY?

Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax-deductible. Businesses deduct capital allowances when computing their taxable profits.

• In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation, but can instead deduct capital allowances.

• The two main types of capital allowances are:

o Writing Down Allowances (WDAs) for plant & machinery - covering most capital equipment used in a trade; and

o Structures and Buildings Allowances (SBA) - covering the construction and renovation of non-residential structures and buildings.

WHY HAS IT BEEN INTRODUCED?

Two reasons - the pandemic and chronic under-investment since the 2008/09 recession.

• Since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and Q3 2020.

• Much of the UK’s productivity gap with competitors is attributable to the UK’s historically low levels of business investment compared to peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.

HOW LONG WILL THE MEASURES LAST FOR?

• The super-deduction is open until 31 March 2023.

• The 50% first-year allowance is open until 31 March 2023 for companies.

• Annual Investment Allowance is open until 31 December 2021.

• Within Freeport tax sites, ECA+ and SBA+ are open until 30 September 2026.

Under the new system a company spending £10m on qualifying assets woud see tax savings jump from £497,800 to £2.47m.

WHAT QUALIFIES AS PLANT?

The Government has not given an exhaustive list but says ‘most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances’. This is an extremely broad definition and the vast majority of kit featured in this magazine should qualify.

NOTABLE EXEMPTIONS

Certain assets do not qualify for the main pool (e.g. cars have their own rates) and second hand assets will go into the pools as normal.

Accounting firm BDO says ‘The new allowances do not apply to assets that fall into the relevant pools but are used for leasing. Therefore, integral features or plant and machinery fixtures installed in a building that is let will not qualify for the new relief. Similarly, expensive machinery acquired by hire businesses will not qualify.’

CAN YOU GIVE US SOME EXAMPLES OF HOW IT WORKS?

Example 1

• A company incurring £1m of qualifying expenditure decides to claim the super-deduction.

• Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits.

• Deducting £1.3m from taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill.

Example 2

Under the previous system:

• A company spends £10m on qualifying assets.

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

• Deducts £1.62m using WDAs at 18%.

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

With super-deduction:

• The same company spends £10m on qualifying assets.

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

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

POLICY OBJECTIVE

This measure is designed to stimulate business investment. It does so by increasing the incentive to invest in plant and machinery by offering higher rates of relief than were previously available.

Since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and Q3 2020.

ECONOMIC IMPACT

The Government expects this measure to have a positive impact on business investment for the period that it will apply. It will do so by reducing the tax-adjusted cost of capital for millions of companies (large and small) investing in qualifying plant and machinery assets. According to estimates from think tank Tax Watch, the super deduction will cost the Government £12 billion. To put that in context the OBR estimates Government spend on universal credit for 2018-19 was around £8bn.

WHO SAID WHAT

Chancellor of the Exchequer Rishi Sunak:

“The super-deduction is the biggest two-year business tax cut in modern British history – driving our economy by helping businesses to invest, grow and support our Plan for Jobs. I urge firms across the UK to invest in our recovery by taking advantage of this great opportunity.”

Neil Ellis, CEO of Blackrow Engineering:

“We were delighted to host the Chancellor for the launch of this initiative, show him our workshops and talk to him about our company. Government initiatives including the furlough scheme and business loans have enabled us to come through this crisis. And we’re hoping that the super-deduction being introduced now will help us power our way out of it.”

Federation of Small Businesses (FSB) national chairman Mike Cherry:  

“The new super deduction option sounds very promising, and we look forward to further detail on the investments it will cover – it should be made accessible to the smallest firms.”

CONCLUSION

Used wisely, this is clearly a great opportunity for companies to take some of the pain out of capital equipment investment. Added to the relatively cheap cost of borrowing at present, it’s hard to think of a time in recent years when productivity focused investments have looked so attractive.

MORE INFORMATION

For more detailed information, such as eligibility criteria, visit the Government’s website here - https://bit.ly/3vt29Yi

The Government says full technical guidance will be published in due course.

FURTHER ADVICE

If you have any questions about this change, contact HMRC by email: contact.capitalallowances@hmrc.gov.uk

 
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