A guide to the Super Deductionby Grace Kneafsey
Grace Kneafsey, head of Business Development at Equipment Connect (and former tax advisor at Deloitte UK) discusses the new Super Deduction, as announced by Rishi Sunak in the 2021 budget.
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"For the next two years, when companies invest, they can reduce their taxable profits not just by a proportion of the cost of that investment, as they do now or even by 100% of their cost, the so-called full expensing some have called for, with the Super Deduction they can now reduce their taxable profits by 130% of the cost."
Rishi Sunak's announcement is great news for UK businesses looking to invest over the next two years. Of course, the draft legislation is quite fiddly & there's much more to the policy than what we heard on budget day (including some key & surprising exclusions).
The Treasury has produced a factsheet - available here - which includes some useful tables to consider the different tax reliefs available. Here's a list of some of the key, practical points for your business:
1. The Super Deduction is only for corporation tax payers.
So if you're a sole trader or partnership, this won't apply. It's important to remember that the Annual Investment Allowance is still available to those businesses such as sole traders (which is staying at £1m for the whole of 2021 - read our blog here on the AIA).
2. There's a Super Deduction AND a Special Rate FYA
Whilst the 130% figure got all the attention, this applies to plant & machinery that would normally fall into the main rate capital allowances pool (18%).
For assets normally falling into the special-rate pool (6%), a first year deduction of 50% of the cost will be permitted. Special rate pool assets cover integral features & thermal insulation, for example.
3. It applies to expenditure from 1 April 2021, but if the contract is dated before 3 March 2021, it's excluded.
If you have upcoming expenditure that's part of a contract from before the Budget, then it won't qualify. The aim of these sort of tax policies is to drive investment - they don't want to offer advantages for purchases you'd already committed to before the announcement.
But the Super Deduction is staying place for expenditure occurred until 31 March 2023, giving plenty of time to take advantage.
4. There's no Super Deduction for used assets.
That's right, investment in used assets is specifically carved out. This has been the most surprising part of the announcement amongst commentators, and is a real break from previous policy (used assets are covered by the AIA for example).
It's going to be interesting to see how this impacts the used market; the government position here is to maximise the economic boost provided by additional investment under the Super Deduction, incentivising purchases of new assets and boosting manufacturing.
How does this interact with the green agenda? On one side, incentivising investment in brand new assets can speed up adoption of new, green technologies. On the other, incentivising increased (and perhaps carbon intensive) manufacturing at the expense of used markets & repairs seems an interesting priority.
What's clear is the balance between these two points will vary hugely between asset classes, but that the exclusion of used assets from the Super Deduction is universal (notwithstanding that there are existing provisions on energy efficiency for a few assets such a business cars - see point 5!)
What's important for businesses investing in used assets is to remember the AIA (and indeed that the enhanced AIA remains in place for 2021) and so you may still be able to deduct 100% of the cost of the investment from your taxable profits in that year using your AIA. This remains a great incentive to invest.
The impact on used assets may become more clear by 2022, when the AIA falls and the difference in short-term tax relief between new and used assets becomes stark for many businesses.
5. Cars are out, as are assets to be leased out
Another specific exclusion from the Super Deduction - cars. But vans (and other commercial vehicles) are in.
Assets to then be on-leased also won't qualify, which is disappointing for landlords and (some) hire businesses alike.
As a general point, it's important to check that your investment is 'qualifying expenditure' before assuming capital allowances can be claimed (whether that's under the Super Deduction, the AIA, specific FYAs, or under the normal rules!)
Here's an example: business cars won't qualify for the Super Deduction, or the AIA. But some energy-efficient cars qualify for a specific First Year Allowance, meaning 100% of the cost can be deducted from taxable profits anyway. Other cars will fall into either the main or special rate pools (depending again on energy efficiency).
6. A clawback on disposal?
The legislation on disposals of assets where the Super Deduction has been claimed applies as per FYAs, meaning an immediate balancing charge (rather than being taken to pools).
Keep in mind that a disposal of an asset that you've claimed the Super Deduction on could create a 'balancing charge' on sale, increasing your taxable profits (clawing back some of the tax break you received).
7. Hire Purchase
It looks as though hire purchase expenditure (on qualifying assets) should be eligible for the Super Deduction, although the draft legislation includes some additional conditions for HP agreements to qualify, which has caused some confusion.
The F&LA has specifically asked HMRC for some clarification on this point, and so we would expect some guidance to be released - watch this space!
Specific tax and accounting advice should be sought in relation to the use of capital allowances.
There's plenty to think about when it comes to tax & investing in new equipment. If you have questions about the Super Deduction, the AIA or other reliefs that might be available to your business, then get in touch:
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