In a bid to stimulate business investment, promote economic growth, and aid with recovery in the wake of COVID-19, the UK government has introduced a super-deduction tax relief scheme, amongst other capital allowances. The temporary super-deduction program provides an alternative to traditional writing-down allowances. It will enable businesses to claim 130% first-year relief on qualifying plant and machinery investments between the 1st April 2021 and the 31st March 2023. Under this measure, businesses could save up to 25p in tax on every £1 they invest in eligible equipment.[1]

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Capital Allowances

Chancellor of the Exchequer, Rishi Sunak, announced in his 2021 Budget a series of capital allowances designed to lower companies’ corporation tax bills; with a view to increasing business investment and productivity, as well as improving the UK’s recovery after COVID-19. These measures could also be seen to serve the government’s ‘levelling up’ initiative which is intended to address the disparity in economic prosperity between northern and southern regions of the UK.[2]

New capital allowances include:

  • Super-deduction: offers companies 130% first-year relief on main rate plant and machinery investments (equipment that would qualify for the 18% write-down allowance) until 31st March 2023.
  • 50% First-year Allowance (FYA): companies can claim back a 50% first-year allowance (FYA) on investments in special rate assets (equipment that would qualify for the 6% write-down allowance) until 31st March 2021.
  • Annual Investment Allowance (AIA): provides 100% relief on plant and machinery investments up to a maximum threshold of £1 million (the highest it has ever been) until 31st December 2021.
  • Enhanced Capital Allowances (ECA+): companies within Freeport tax sites can claim 100% capital allowance for plant and equipment investments until September 2026.
  • Structure & Building Allowance (SBA+): companies, individuals, and partnerships operating within Freeport tax sites can claim 10% capital allowance for investments in structures and buildings until September 2026. This is significantly better than the 3% available nationwide.

How Does Super-Deduction Tax Relief Work?

Capital allowance schemes let taxpayers write off the cost of certain capital assets against taxable income. This means that businesses can deduct the cost of qualifying plant and machinery from their taxable profit. The super-deduction tax break allows companies to write-off up to 130% of the cost of eligible equipment against their taxable profit.

This is how the super-deduction tax relief would work for a company incurring £1 million of qualifying machinery and plant expenditure:

  • Spending £1 million on eligible investments means the company is entitled to deduct £1.3 million (130% of the initial investment cost) from its taxable profit.
  • As corporation tax is 19%, the company’s corporation tax bill will be reduced by 19% of the deducted £1.3 million, which is £247 000.

Why is Super-Deduction Better Than the Previous System?

The super-deduction tax break can save companies more money on their corporation tax bills as illustrated below:

Previous System

Using the previous system, a business spending £10 million on qualifying assets would save £497 800 on its tax bill:

  1. Appling AIA (Annual Investment Allowance) to the eligible asset expenditure, £1 million is deducted leaving £9 million. 
  2. Using WDAs (Write Down Allowances) at 18%, a further deduction of £1.62 million is made.
  3. This gives a total deduction of £2.62 million.
  4. This means (as corporation tax is 19%) the company’s corporation tax bill will be reduced by 19% of the deducted £2.62 million, which is £497 800.

Super-Deduction

Using super-deduction capital allowance, this same company would make a saving of £2.47 million on its corporation tax bill:

  1. As the company has spent £10 million on qualifying assets, it can deduct £13 million (130%) in year one.
  2.  This means (as corporation tax is 19%) the company’s corporation tax bill will be reduced by 19% of the deducted £13 million, which is £2.47 million.

Which Equipment Qualifies for Super-Deduction?

The following plant and machinery assets qualify for either the super-deduction or 50% FYA capital allowance:

  • Solar panels
  • Computer equipment and servers
  • Tractors, lorries, and vans
  • Ladders, drills, and cranes
  • Office chairs and desks
  • Electric vehicle charge points
  • Refrigeration units
  • Compressors
  • Foundry equipment

Please note this is not an exhaustive list, other assets may qualify. However, all equipment MUST be new.

Other Criteria

In addition to the above, businesses are required to meet the following criteria to claim super-deduction FYA:

  • Investment in qualifying plant and machinery equipment must have occurred between the 1st April 2021 and 31st March 2023; contracts entered into after the 3rd March 2021 will also be honoured.
  • Be a company within the charge to corporation tax.

Furthermore, asset expenditure will NOT qualify if any of the general exclusions outlined in s.46(2) CAA 2001 apply, for example:

  • “Expenditure in a chargeable period where the qualifying activity is permanently discounted.
  • Expenditure on the provision of plant or machinery for leasing.
  • Expenditure on an asset which was initially acquired for purposes other than those of the qualifying activity.
  • Assets acquired by way of a gift.”[3]

What are the Aims of the Capital Allowance Policies?

The super-deduction capital allowance is the "biggest two-year business tax cut in modern British history", encouraging companies to bring planned investments forward and make additional purchases. It is hoped that this policy will unlock up to £20 billion a year in business investment. Increased company spending should promote economic growth and counter business cycles. Introducing incentives to spend is particularly pertinent now as, due to COVID-19, business investment has fallen by 11.6% from 2019 (Q3 2019 to Q3 2020).

Moreover, providing an array of attractive capital allowance schemes will make the UK more internationally competitive. They offer a motive for both domestic and international firms to invest in Great Britain and Northern Ireland. It is hoped that this will augment productivity and improve the UK’s standing amongst the OECD.

Elke Asen, writing for Tax Foundation, postulates that these measures could also contribute to the UK government’s ‘levelling up’ initiative which is committed to ensuring economic prosperity across all regions of England, Scotland, Wales, and Northern Ireland. Asen argues that limiting capital allowances in the late 2000s whilst cutting corporation tax contributed to the economic north-south divide. Reducing corporation tax favoured service-based industries primarily located in the south. Moreover, in attempting to recoup tax revenue losses through limiting capital allowances, the UK government ended up disproportionately harming capital-intensive, manufacturing business that tended to be situated in the north. Introducing the super-deduction capital allowance may go some way to redressing this imbalance.[4]

Further Information

For more information regarding the UK government’s super-deduction tax relief or the other capital allowance schemes introduced in the 2021 Budget, please download this guide or visit the Gov.uk website.

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[1]Information regarding super-deduction tax relief and other capital allowance measures have been gathered using the following sources

Where other sources or direct quotations have been used, additional references have been added.

[2] Elke Asen, ‘Leveling Up: The UK’s Super-Deduction and its Regional Divide’, in Tax Foundation, last accessed 30 April 2021 <https://taxfoundation.org/uk-super-deduction/>

[3] Leavitt Walmsley Associates, ‘Everything you need to know about super-deduction & new capital allowances’, in Bloomsbury Professional Tax, last accessed 30 April 2021 < https://tax.bloomsburyprofessional.com/blog/everything-you-need-to-know-about-the-super-deduction-new-capital-allowances

[4] Elke Asen, ‘Leveling Up: The UK’s Super-Deduction and its Regional Divide’