Making use of the super-deduction

Stephanie Hurst

In this article, Stephanie Hurst, Senior Corporate Tax Manager at MHA Monahans, discusses how companies can make the most of the super-deduction.

Currently, businesses investing in new equipment can claim tax relief under the Annual Investment Allowance (AIA) regime. This relief allows a business to deduct 100 percent of the cost of qualifying purchases up to £1million from their tax bill.

Over the years the AIA level has fluctuated and the Government’s intention was to reduce the maximum claim to £200,000 from January 2022. In an attempt to stimulate investment this was delayed in the Chancellor’s Autumn Budget until at least March 2023.

Although planned changes to AIA are not happening just yet, companies still need to be aware of the opportunities posed by the so-called ‘super-deduction’ – especially because many businesses will be able to claim both.

AIA and the super-deduction: Key differences

The first point to mention is that while partnerships and sole traders can claim the AIA, they do not qualify for the super-deduction. This new relief is only for companies.

Part of the reason for this is that the super-deduction has no limit. When the reduction to AIA is implemented – as we assume it will, further down the line – the £200,000 limit should still be fairly generous for sole traders.

These exceptions aside, most businesses can make a claim. Those who lease out their assets – car rental businesses, for example – are excluded, but property businesses may be eligible. As a general rule, if a business is able to make a capital allowances claim, it may also be able to claim the super-deduction.

How does the super-deduction work?

There are two rates which can be claimed, the most common of which is a 130 percent deduction. The rule to remember here is that anything purchased must be brand new, second-hand equipment will not be eligible. Generally, most plant machinery is covered by the relief, including computers, furniture, farm vehicles etc. One important note is that new cars are not included, but vans are.

The second rate is a 50 percent deduction, which applies to any machinery deemed as ‘special rate expenditure’. This applies to anything which is integral to the building, which could include electrical systems, cold water and heating systems, lifts, escalators and solar panels. If the AIA is not available companies can only claim six percent relief per annum on these purchases, so this is a generous increase.

Timing is everything

The super-deduction is a limited-time scheme which will come to an end on 1st April 2023. There will be some transitional rules which will apply, depending on when purchases are made and what your accounting period is.

It’s important to consider how long you intend to use the machinery for. If you sell equipment which was subject to a super-deduction claim, depending on when it is sold and what for, there may be some tax to pay on that disposal. There are some strange rules, so be aware of these if you’re intending to use this relief and consider whether this is the best move for your business.

It’s also important to remember that there are ownership and payment obligation rules to consider where capital allowances are concerned.  Don’t make the mistake of ordering purchases just before year-end without reviewing the position or you may need to wait longer than anticipated to reap any tax benefits.

Companies must also consider their cash flow. This relief can only be claimed on brand new purchases, but sometimes it will be better for businesses to buy second-hand. Think about your business needs and plan ahead.

The devil is in the detail

A final piece of advice is to collect as much detailed data as possible, particularly if you’re making building improvements. A business can claim against some of the cost of an extension or refit, for example, but itemised invoices will help to strengthen your claim. Keep track of every purchase and ask suppliers to provide you with a detailed breakdown of costs.

The super-deduction is a generous relief for companies, but the limited-time requires some planning. For advice on the best tax relief for your business, please get in touch.

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