The 2021 Spring Budget said a lot but ultimately did very little. It set the scene for tax rises in the future, but not in the coming year. One thing that was changed was the incentive for UK businesses to spend money…

Back in the summer of 2020 we had the “eat out to help out” scheme where the government effectively subsidised costs of eating out in cafes and restaurants to boost the hospitality sector. The Super Deduction in many ways is an attempt to do something similar but for the broader economy. This starts from 1 April 2021.

There are some items in the small print, however, that stop it from being as generous as it first seems. The legislation excludes sole traders and partnerships, so if your business doesn’t trade via a limited company you cannot get the “super deduction”.

Additionally, it only applies to new assets purchased, excluding those bought second hand. It also has some significant exclusions, for example cars and electric cars are both excluded from this allowance.

The “super deduction” is a boost to the already generous “Annual Investment Allowance” (AIA) which was a tax break introduced to boost the economy from the financial crash of 2007/8.

Both the original AIA rules and the new super deduction rules are intended to encourage businesses to invest in plant and equipment for their business. The “Super Deduction” increases the tax benefit in the year of purchase from 100% tax to 130% tax reduction based on the purchase value of applicable new assets value bought by limited companies. The asset has to be purchased and cannot be rented.

The plan is that by incentivising businesses to spend money on capital, and usually higher value, items this will encourage money to flow around the economy and support jobs and boost “confidence” in the economy. As generally people and businesses only spend money when they are confident about the future.

From 1 April 2021 until 31 March 2023 when a UK business buys plant or machinery for the business, you will now be able to claim an additional 30% of this cost against your tax bill.

This means that this tax benefit will end just as corporation tax goes up to its new rate of 25%.

If you had entered into a contract to buy an item before the 3rd March that isn’t delivered until after 1 April 2021 then the deduction cannot be applied.

The guidance released states that effectively business assets purchased that are brand new and would otherwise be applicable for the Annual investment Allowance will be applicable for the Super Deduction.

If you are buying an item on finance, you must be sure that you are entering into a “finance” agreement and not a rental agreement.

Some signs to look out for are if the agreement charges VAT upfront it would suggest you are buying the asset and it is applicable. If, however, VAT is charged on the monthly payments then it would suggest you have bought the asset on a rental agreement. Finance arrangements can be tricky to navigate so make sure you ask the sales representative to confirm the details and if in doubt one of our client mangers can check the contract over.

Assets that are included in the Super Deduction are:

  • Machinery
  • Vans & trucks
  • IT equipment
  • Furniture
  • Solar panel
  • Electric charge points

Notable exclusions are that the following costs cannot be claimed under the “super deduction”:

  • Cars
  • Electric Cars
  • Construction of new Property
  • Refurbishment of property costs
  • Assets deemed “Long Life” (any item expected to last more than 25 years)

The Guidance from HMRC is not exhaustive, so if in doubt it is always best to check if the asset is applicable.  If you are buying an asset for your business, then despite these tax incentives it is usually best to not let tax be the tail that wags the dog. If your business has available cash and doesn’t need to buy an asset there may be other investment or tax planning options that you could utilise.

Some assets like cars only get their cost spread over a long period of time by the tax man. This used to be the case for all assets until the AIA rules were introduced.

Say you buy a car for £30,000. You might only get £2,400 of this cost against your taxable profit each year. Using corporation tax rates, this would save £456 in corporation tax in that year. You cannot claim Annual Investment Allowance on cars

Even electric cars do not benefit from it, instead they get a separate “first year allowance”, which although means you get 100% of the cost allowed for tax purposes in year one, the distinction is important because it actually excludes them from the “Super Deduction”.

This made it possible to buy an item in the financial year and the full value of the item reduced your businesses tax liability in full in that year. So, let’s say you bought a van worth £30,000, the annual investment allowance the whole value would be offset for tax in the year you bought it. So again, using current corporation tax rates this would be a tax saving of £5,700.

The super deduction effectively means, via the tax bill, businesses are being subsidised to buy assets.  If we take the £30,000 van example again, if you bought the van after 1 April 2021 then the super deduction would apply. This means the cost of the van for tax purposes would be £39,000, therefore saving £7,410 for a business paying corporation tax, and possibly more for a business that is an unincorporated partnership or sole trader.

The super deduction in this example means an additional £1,710 of tax saving.

One additional item to note, there is a down side to the Annual investment Allowance. If you claim 100% allowances in the year you buy the asset but then sell the asset a year or two later then the whole value you sold the asset for becomes taxable.

For example:

  • If you bought a van for £30,000
  • Then 3 years later sold it for £15,000
  • Then although you saved £5,700 in tax in the year of purchase, you have to pay tax on the £15,000 in the year of sale of £2,850 (based on 19% corporation tax)
  • If you bought that van now and sold in 2023, when corporation tax rises to 25% then this might mean you are saving tax at 19% but paying at a higher rate when the asset is sold.
  • At 23% tax, the sale of the van would attract tax of £3,750.

Some commentators are suggesting that on selling an asset that attracted a super deduction you may have to pay some of this increased tax benefit back, but it is largely expected that when the final legislation is put in place that the super deduction will not change this normal “balancing charge” calculation, and therefore the tax due on sale would be the same as under the Annual Investment Allowance rules. But a word of caution that this hasn’t been detailed in law at the time of writing.

As you can see, this is quite a complicated system. If you are planning on investing in your business, please speak to one of our team to discuss the super deduction in more detail and whether this is the right move for your business.
It’s important you don’t look at the situation solely from a tax perspective, whilst it is important, it’s not as important as making the right investment decisions for the future of your business.
Our team can also help you find other ways to maximise the tax reliefs available to your business.
Email or call 01474 853 856.

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Josh Curties

BA (Hons) FCA

Partner & Principal Adviser

01474 853856

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