Capital Allowance Super-Deduction – Incentive For Investment

The article below is partially outdated as on 15th March 2023, the Chancellor announced in his Spring Budget that the Super-deduction capital allowance would now be replaced with “Full Expensing” for the 3 years period from 1st April 2023 to 31st March 2026. However the special rate capital allowance will be extended for the same three year period

In March 2021 Chancellor, Rishi Sunak, announced a new Super-deduction and a First Year Allowance as a way of encouraging businesses to invest in new plant and machinery as well as long life and integral features, helping to further grow investment in the UK.

What are the Super Deduction and First Year Allowances?

The Super-deduction is a 130% first-year capital allowance that allows businesses to deduct 130% of the cost of qualifying expenditure against their taxable profits.

The First Year Allowance for qualifying special rate assets allows businesses to deduct 50% of the cost of qualifying long-life assets and integral features against their taxable profits.

What type of expenditure can be claimed?

The expenditure on plant and machinery that would qualify for the 130% deduction is exhaustive.

Examples of qualifying plant and machinery include:

• Vehicles used for trading purposes i.e. trucks/lorries/vans
• Construction vehicles and machinery
• Agricultural machinery
• Office furniture
• Electric vehicle charging points
• Foundry equipment
• Refrigeration and kitchen equipment
• Computer equipment and servers

The First Year Allowance for qualifying special rate assets includes machinery and equipment that is an integral feature to a building or structure, such as:

• Solar panels
• Lifts and escalators
• Electrical systems
• Heating systems

In order to qualify as capital investment, the plant and machinery must be new and is only applicable on expenditure between 1st April 2021 and 31st March 2023.

Who can claim the Super-deduction or Special Rate deduction?

The new super-deduction and special rate deductions are only applicable to companies who are liable to corporation tax. Unincorporated business such as sole traders, partnerships or LLPs cannot claim, however the Annual Investment Allowance (AIA) is still available to them.

What level of allowance can be claimed?

There is no limit on the amount of capital investment that can qualify for the super deduction or special rate deduction, unlike the Annual Investment Allowance which has a cap of £1m on qualifying expenditure.

What is the financial benefit of claiming the super-deduction tax allowance?

The allowance can be valuable to a great number of sectors such as agriculture, construction, restaurants and hotels, industries where plant and machinery comprising large value items is purchased.

For example, if a company chose to install several new electric vehicle charging points on their site at a cost of £150,000 and decided to claim the super-deduction, it would mean that the company could deduct £195,000 (130% of £150,000) from its taxable profits.

With a corporation tax rate of 19% this financial year (2022/23) it would result in a tax saving of £37,050.

Is it time your business considered bringing forward investment in new plant and machinery?

When deciding on the most tax-efficient way to deal with capital allowances, businesses will need to balance their needs and wishes against their current cash flow. This requires careful forecasting to ensure that your business makes the right decisions.

For help and advice on all capital allowance claims and tax implications on major capital expenditure contact us at Friend Partnership.