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Is it a bird, is it a plane, is it normal capital allowances? No it’s super deductions!
If you’re planning on investing in new plant and machinery assets for your business you could save tax if you buy them before 31 March 2023 and take advantage of capital allowance super deductions.
In the March 2021 budget the government introduced capital allowance super deductions as a way to encourage businesses to invest in plant and machinery assets. It was part of a number of measures to encourage business growth after the Covid-19 pandemic. Extra tax relief is available on qualifying assets purchased from 1 April 2021 to 31 March 2023.
Before we get to the super deductions, let’s look at how capital allowances usually work.
Normally when a business buys assets, such as tools, equipment, machinery or vehicles, the cost of the asset can be claimed in the tax return using capital allowances.
Assets live in pools and the portion of the asset value that can be claimed in the tax return each year depends on which pool. The majority of assets live in the main rate pool which allows 18% to be claimed each year. However some assets, like cars, have pools at a lower rate e.g. the Special Rate pool only allows 6% of the value to be claimed each year.
18% or 6% per year doesn’t sound that great, but the majority of businesses can actually claim the whole value of the asset in year one. This is done through the annual investment allowance (or first year allowances for certain assets). It applies to most new assets except cars, and gives 100% of the value in the year of purchase. If it’s not claimed in that first year (or not entirely claimed) the rest of the value reverts to the standard 18% or 6% per year.
Capital allowance rates and rules can be changed and are a way for the government to encourage particular activities e.g. favourable rates on electric cars, unfavourable rates on high emission cars. In the case of the super deductions, it’s an incentive to encourage investment and growth.
The super deductions give 130% first year capital allowances on most new main rate pool plant and machinery investments. You are able to claim more than the actual cost of the asset.
So instead of the usual 100% for annual investment allowance / first year allowance or 18% for standard writing down allowance, you can claim 130% of the value in the first year.
For special rate assets where only 6% of the value can normally be claimed each year, the super deductions allow 50% of the value to be claimed in the first year.
Sadly the super deductions don’t apply to types of business, only to limited companies.
Capital allowances can be claimed by sole traders, partnerships, furnished holiday lets and limited companies. However only limited companies can claim the super deductions.
These are typically moveable plant and machinery type assets including computer equipment, commercial vehicles such as tractors, lorries and vans, tools and machinery such as ladders, drills, cranes, office equipment such as desks and chairs.
Integral features in a building such as the heating and lighting systems may not qualify for the 130% but could qualify for the 50%. This also applies to long life assets (with a useful life of at least 25 years), thermal insulation added to buildings and solar panels.
There are a number of exclusions, but some of the main ones include:
Second hand assets – it must be a new, unused asset.
Assets given as a gift.
Cars (but commercial vehicles and vans are allowed).
Plant and machinery purchased for leasing, i.e. bought in order to lease out to other people. The exception to this is background plant and machinery within a building.
Buildings and structures
Additionally if you are ceasing your business, you can’t claim the super deductions in your final accounting period.
The super deductions are claimed in the same way as the standard capital allowances on the company corporation tax return.
Assets where super deductions have been claimed will need different treatment on sale or disposal.
If you’re disposing of the asset in an accounting period that ends before 1 April 2023 (so still during the super deductions period) then it’s more straightforward. You claimed 130% of the asset value, so you give back 130% of the disposal value (as a balancing charge).
If you’re disposing of an asset in an accounting period that begins after 1 April 2023 (so falls entirely outside the super deductions period) then the disposal value stays as it is, no adjustment required.
If you dispose of an asset that starts in the super deduction period but ends after, then it gets tricker as you end up with a hybrid approach. The disposal value is effectively pro-rated based on the amount of time inside and outside the super deduction period. The super deduction part of the value is at 130% and the rest at 100%.
There are more complexities if you only claimed super deductions on part of the asset value. There are also differences in how the disposal is dealt with in relation to the rest of your existing assets.
This may well be one for your accountant to grapple with. However, in terms of what you would need to know as a business owner, it saves tax to dispose of the super deduction assets outside of the super deduction period and particularly to wait until a business financial year that begins after 1 April 2023.
If you aren’t ready to buy new assets right now, but are worried about missing out on the super deductions savings, then don’t worry, all is not lost.
Corporation tax rates are increasing from April 23 to a rate between 19% and 25% (depending on profit levels) for businesses with profits over £50,000. Claiming normal capital allowances with a 25% tax rate gives similar tax savings to claiming 130% at a 19% tax rate.
If the asset cost £1,000 then under 130% super deductions you can claim £1,300 which saves tax of £247 at 19%.
If you claim capital allowances on an asset costing £1,000 with a tax rate of 25% then you save £250 tax. This might all be in year one if you can claim annual investment allowance, or more spread out if you have to claim writing down allowance.
So if you have profits over £250,000 and know that you’re going to be at the 25% tax rate, you don’t necessarily need to rush. Waiting until the corporation tax rate goes up will give you similar tax savings on your capital allowances.
However for those businesses with profits over £50,000 but under £250,000 who will end up on a hybrid rate between 19% and 25%, it may be more advantageous to go for the super deductions depending on your profit and therefore the tax rate applied.
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