In this article, we explore the significance of the Capital Allowance Super Deduction, how it works, and why businesses should act swiftly if they have unclaimed qualifying expenditure.
Background to the Super Deduction
In the Spring Budget 2021 it was announced that a new Super Deduction and first year allowance were to be launched to encourage business investment and spending, which had fallen during the COVID-19 pandemic. These allowances make existing capital allowances more generous, allowing companies to write off 130% of qualifying expenditure against tax. It has applied to qualifying expenditure incurred from 1 April 2021 to 31 March 2023.
From 1 April 2023 to 31 March 2026, the Super Deduction has been replaced by a new capital allowances regime called ‘Full Expensing’. This allows 100% of the cost of qualifying assets to be written off. Whilst still a worthwhile relief for qualifying expenditure, it is not quite as generous as the Super Deduction.
You still have time to utilise the Super Deduction
Qualifying expenditure is often overlooked. If you have spent money on building or refurbishing property during this timeframe, or have bought an unused property in that time, you may still be able to make a claim for the Super Deduction or First Year Allowance.
But you will need to act quickly. For example, qualifying expenditure during the year to 31 March 2022 must be recorded in the tax return for that year. The deadline for filing this return was 31 March 2023, but you can still make amendments up to 31 March 2024, if you haven’t yet included included any qualifying expenditure.
Cut your tax bill by 25p for every £1 spent
Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery are allowed to claim:
- A Super Deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
- A First Year Allowance (FYA) of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
This upfront Super Deduction allows companies to cut their tax bill by up to 25p for every £1 they invest.
Both the Super Deduction and First Year Allowance therefore give businesses investing in qualifying equipment a much higher tax deduction in the tax year of purchase than they would have otherwise received.
It can also be used alongside AIA
Furthermore, these allowances are available alongside the ongoing Annual Investment Allowance (AIA) which provides 100% relief for costs of qualifying plant and machinery in the tax year of purchase.
The AIA expenditure limit was also previously extended to £1 million until 31 December 2021. Whilst the AIA is available on plant and machinery similar to the super deduction it can also be used on second-hand equipment and assets qualifying as special rate.
Who qualifies?
The Super Deduction and FYA are only available to companies subject to corporation tax, not individuals, unincorporated businesses, partnerships or LLPs.
What expenditure qualifies?
- New and unused plant and machinery assets such as machinery, commercial vehicles, computer equipment, software, and furniture.
- The contract for the plant and machinery (including fixtures installed under a construction contract) must have been entered into after 3 March 2021 and expenditure incurred after 1 April 2021.
- There is no limit or cap on the amount of expenditure that qualifies.
- It is not available for assets that will be leased or hired out, used or second-hand items. Cars are also excluded.
- If the asset receiving the super deduction is later sold, the proceeds must be taxed at 130%.
- If you buy assets in an accounting period which passes the end date of 31st March 2023, it must be pro-rated down depending on the length of accounting period falling after this date.
We can assist with your Capital Allowance claims
We are able to assist clients in their planning and applying these allowances. Please contact us to discuss your requirements.
With more than 20 years in tax, Paul provides tax compliance and advisory services to clients, and specialises in R&D and capital allowance claims.