The new 130 percent super-deduction: how will it work?

The Government has published new guidance on the 130% super-deduction capital allowance, the 50% first-year allowance for qualifying special rate assets, and the new Enhanced Capital Allowances for Freeports.

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:

• a 130% super-deduction capital allowance on qualifying main rate plant and machinery investments; and
• a 50% first-year allowance (FYA) for qualifying special rate (including long life)

The 130% super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.

Within Freeport tax sites, companies can also access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026.

Last November, the Government also announced that the temporary increase in the Annual Investment Allowance (AIA) to £1 million, providing 100% relief for qualifying plant and machinery investments, would be extended until 31 December 2021. From 1 January 2022, the AIA cap reverts to £200,000. Note that, unlike the super-deduction the AIA is available to incorporated and unincorporated businesses.

Examples of the super-deduction in practice

Example 1

ABC Ltd, incurs £1 million of qualifying expenditure on 1 May 2021 and decides to claim the super-deduction.

Spending £1 million on qualifying investments will mean the company can deduct £1.3 million (130% of the initial investment) in computing its taxable profits.

Deducting £1.3 million from its taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill, i.e. 24.7p in the pound.

If ABC Ltd had instead claimed AIA, it would have only been able to deduct £1 million (100% of the initial investment) in computing its taxable profits, i.e. a saving of £190,000 – 19p in the pound.

So, the introduction of the super-deduction will have saved ABC Ltd an extra 5.7p in the pound.

Note that the benefit of the new super-deduction compared to the AIA potentially becomes greater as the reduction in the AIA cap to £200,000 takes effect. For example, for a company with an accounting period 1 April 2021 to 31 March 2022 the maximum AIA would be £800,000:

• 1 April 2021 to 31 December 2021 – £1,000,000 x 9/12 = £750,000.
• 1 January 2022 to 31 March 2022 – £200,000 x 3/12 = £50,000.

And, of course, as the intention of the new super-deduction is to encourage firms to invest now, ABC Ltd may have only decided to make this investment when it did so as to benefit from the new deduction.

Example 2

XYZ Ltd incurs £10 million of qualifying expenditure on 1 May 2021 and decides to claim the super-deduction.

So, the introduction of the 130% super-deduction will have saved XYZ Ltd £1,972,200 in year 1. Over time, the combination of AIA and WDA would provide the company with a 100% deduction, and some of that deduction will be at a higher rate of corporation tax than 19%, bearing in mind that the main rate will be 25% from 1 April 2023. Of course, that requires waiting very many years, as the WDA calculated on the reduced balance of the cost each year.

And as mentioned above, the benefit of the new super-deduction compared to the AIA potentially becomes even greater as the reduction in the AIA cap to £200,000 takes effect.

More information about capital allowances

Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. Businesses deduct capital allowances when computing their taxable profits.

In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation, but can instead deduct capital allowances. For example, a company with accounting profits of £1,000, depreciation expense of £200 and total capital allowance claims of £300 would make the following adjustment:

• Add £200 (depreciation expense) to £1,000 (accounting profits) = £1,200;
• Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits);
• Apply the appropriate tax rate, e.g. corporation tax at 19%: £900 x 19% = £171 tax due.

The two main types of capital allowances are:

• WDAs for plant & machinery – covering most capital equipment used in a trade – which are deducted on a reducing balance basis; and
• Structures and Buildings Allowances (SBAs) – covering the construction and renovation of non-residential structures and buildings – which are deducted on a straight line basis, i.e. the same amount is deducted each year.

Plant and machinery

Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances. There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for either the super-deduction or the 50% FYA include, but are not limited to:

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

More detail on the eligibility of different types of investments for different types of capital allowances is set out in the table below:

Source: HM Treasury Super-deduction factsheet – 5 March 2021 and Techlink.

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