Today is the first day of super-deduction! Although I’m sure you’ll agree that it sounds exciting, I thought I’d spend some time trying to deduce just how super it really is and I’m happy to share my findings with you….

Introduced by the Chancellor in his Budget on 3 March, super-deduction is essentially enhanced tax relief for certain assets bought by companies (not sole traders or partnerships) and it relates to ‘plant or machinery’ that is bought for the purpose of the company’s trade or business.

How the super-deduction works

If your company spends £100 on qualifying plant, it can obtain a £130 deduction for it, so essentially it saves £24.70 in tax per £100 spent. There is a lesser deduction of 50% for any “long life” assets but, bearing in mind the Annual Investment Allowance (AIA) still allows a 100% deduction for the first £1m of spend on plant or machinery, this 50% deduction is only likely to benefit companies with very significant capital spend, as you would choose AIA first. There is also a sting in the tail – if the asset is later sold, the company has to tax the proceeds at 130% too, which could be costly for assets sold after 1 April 2023 when the corporation tax rate increases to 25% for companies with profits of £250k or more.

Bear in mind that from 1 April 2023, if the AIA is still available, you would get 25% tax relief on plant purchases because of the increase in corporation tax.

If you are planning ahead for capital expenditure, you should note that the super-deduction may not be at 130% if you buy assets in an accounting period that straddles the end date of 31 March 2023, as it is prorated down depending on the length of accounting period falling after that date. For example, if you have a year ending 31 December 2023, the super-deduction from 1 Jan – 31 March 2023 is 107.5%.

Some not-so-super exclusions

  • Assets for leasing
    If you operate a hire company and your customers hire plant from you, then that plant does not qualify. It could qualify if your customers contract for the plant with an operator instead because that is deemed to be the provision of a service rather than a lease. Obviously, there may be some grey areas here so get in touch if you are unsure.
    It is not yet clear whether plant used in a let office building might qualify. If you let an entire building, that is classed as a leased asset and no super-deduction is available but, say you have an office building and you let out individual offices or floors, there will be some communal areas that are not leased out and it is possible that plant for those areas may qualify. We are waiting for clarity on this from HM Revenue and Customs (HMRC).
    If you operate a hire business but you need plant to transport the hire equipment, to service it, or for use in your own offices, then that should qualify for super-deduction. It is only the actual leased assets that are excluded by this rule.
  • Assets acquired via hire purchase
    Genuine hire purchase assets should qualify for super-deduction, but there will be some provisions to exclude contrived leasing arrangements.
  • Second-hand assets
    The super-deduction relief is intended to stimulate the economy and it only applies to new purchases of unused assets.
  • Cars
    Vans are ok, assuming they are not excluded otherwise, but all cars are excluded.
  • Pre 3 March 2021 assets
    If there was a contract was in place for the asset on or before Budget day on 3 March 2021, super-deduction will not be applicable.

Other unclear areas

There is a question around whether solar panels on buildings will qualify for the 130% relief or if they deemed to be long-life assets. Likewise, software and other IT-related spend such as website design are questionable. These are often grey areas in terms of whether they should be capitalised as an asset or expensed as a repair, and again we are hopeful that HMRC will provide clarity.

So, super or not?

As is usually the case in tax, the real value of a relief or allowance often depends on the specific circumstances in which it is being applied. What might work very well for one client, could have different consequences for another and that is why it is always advisable to seek professional advice in relation to your own affairs.

This is new legislation and there will doubtless be additional areas of clarification required as we get further into this new super-deduction period. If any of your purchasing decisions depend on whether super-deduction will apply, please get in touch and we’ll help you arrive at the most super solution for your specific circumstances.

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Kate Naylor
Kate Naylor

Tax Partner

Kate works with businesses and their owners on tax strategies and mitigation, looking at business and personal tax structures to achieve long term goals.

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