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The Super-Deduction Tax Scheme: Every Business Owner Needs to Know About It

03 September 2021

The Chancellor’s Budget 2021 passed a new super-deduction capital allowance scheme, meaning that qualifying plant and machinery investments acquired between 1 April 2021, and 31 March 2023, will be eligible for tax relief at a rate of 130%.

This super-deduction tax scheme aims to promote investment in the U.K. after lockdowns killed the economy. This program is open to all businesses, no matter their size.

What is the New Super-Deduction Tax?

Based on the new super-deduction scheme, companies will be able to claim a 130% tax relief on plant and machinery investment that meet the criteria pre-set by the authorities, as well as a 50% first-year tax relief on a qualifying particular rate assets.

Businesses will, thus, be able to reduce their tax bills by around 25p for every £1 invested, thanks to the super-deduction. The new scheme includes all new plants and machinery that usually qualifies for the 18% primary pool rate of allowances.

The capital allowance is worth more than what you paid for the asset, which is why it is called a ‘super-deduction.’ This new tax relief may have a significant impact on about 2.8 million businesses that get qualifying plant and machinery expenditures. The deduction will provide a powerful incentive for firms to make additional investments and speed up planned investments.

What Does the Scheme Cover?

Most physical capital assets used for business processes are considered plant and machinery for the sole aim of asking for the super-deduction capital allowances. Therefore, the list of plant and machinery assets is not exhaustive and includes some purchases that meet the criteria for either the super-deduction scheme or the tax relief:

  • Computer equipment and servers
  • Drainage Equipment
  • Battery energy storage systems
  • Diggers, Machinery, cranes
  • Tractors, lorries, vans
  • Brewery Equipment
  • Solar panels
  • Office Furniture inc Fitout’s
  • Refrigeration units
  • Electric vehicle charge points
  • Foundry equipment
  • Compressors

How to Calculate the Super Deduction

Using the new super-deduction tax scheme, not only will you get to deduct £50,000 for your new ergonomic chair, but you will also be able to discount 130% of the purchase price.

Let’s look at what this means for your tax bill. Suppose your firm has a profit of £10,000 and a depreciation deduction of £1,000 for the year. You would have to add back the depreciation under the capital allowance scheme:

So, £10,000 + £1,000 = £11,000.

Next, you would need to deduct the ergonomic chair for tax purposes:

£11,000 – £5,000 = £6,000.

Then, calculate the Corporate Tax of 19% on £6,000 = £1,140.

However, under the super-deduction scheme, you could claim 130% of the chair, or £6,500.

So, £11,000 – £6,500 = £4,500.

Add the Corporate Tax of 19% on £4,500 = £855.

That’s a total tax saving of £285.

The gains will be more notable for more prominent businesses; however, small firms could also do a lot with some spare money. If you add these deductions, the sum can be huge.

Does the Tax Relief Apply to Hire Purchases?

The hire purchase facility allows firms to expand the cost of buying new equipment over a few years with fixed monthly payments. Businesses that utilise the hire purchase service can still claim under the super-deduction capital allowance.

Thus, a hire purchase service can spread the investment cost and free up cash flow while also enabling the firm to take advantage of the generous tax allowances. For companies without the necessary cash to buy equipment in one go or those who want to keep money in the firm, a hire purchase service is an ideal solution, so if you need it for your firm, don’t hesitate to contact us.

However, even though the super-deduction capital allowance applies to those using hire purchase, the authorities ask you to meet particular criteria, including:

  • You pay a regular sum of money in return for cleared assets
  • You can ultimately own them
  • You gained an expense as the recipient of the products

More than a third of firms use the hire purchase facility to make these investments. So, since the hire purchases can also be included in your calculations, the scheme is more beneficial.

Finance Solution’s Take on Super-Deduction Capital Allowance

Our advice to businesses looking to maximise their tax savings is to plan ahead of time and discuss any investment plans on plant and machinery assets they want to purchase so they can take advantage to the fullest of these projects.

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