Capital allowances and super deduction- what do you need to know?

What are Capital Allowances?

 When operating as a Limited Company, it is not unusual for your business to purchase and hold assets for the purposes of trading. Thankfully, as these purchases will clearly be business related, they can qualify for tax relief which thereby reduces your company’s corporation tax bill. A capital purchase for your business is fully or partially (dependent on the type of asset purchased) deducted from company profits, and it is this deduction that coins the technical term of a ‘capital allowance’. The assets which qualify for capital allowances are those in which you keep to use in your business- such as equipment, machinery and business vehicles. Any capital assets that the business owns are shown within your company’s balance sheet, whereas ‘standard’ costs of trading, such as travel and subscription costs for instance, are shown with the company’s profit & loss (P&L) statement.

Distinguishing a capital expense from a trading expense

 Capital expenditure tends to be for items with a lasting benefit for your business (typically longer than a year but is of course dependent on your type of industry), whereas trading expenses are for those items which have a short term benefit to the business or get used up in production. How the expense in question is treated within the accounts can impact your business in a number of ways (for instance both in taxation and profitability), and so if you do have any questions specific to your business, please do reach out and we can provide you with advice on this as it is not always as simple as one may originally think.

What is the Super Deduction Allowance (SDA)?

The super-deduction allowance, announced by the Government in early 2021,  is a form of capital allowances that can be utilised between the periods of 1st April 2021 through to 31st March 2023. During this period, your company may claim a 130% capital allowance on qualifying plant and machinery investments and a 50% first-year allowance on qualifying special rate assets. What this means in practical terms, is that instead of receiving 19% tax relief that most businesses have been used to now for some time, asset purchases that qualify for the super deduction allowance would instead be eligible to receive 25% tax relief- equating to a 6% tax saving!

Eligibility and qualifying expenditure

In order to claim the super deduction allowance, your company must be making a profit which would enable corporation tax to be incurred. Hence, the super deduction may only be claimed to reduce business profits and cannot be applied to force the company to be loss making in the qualifying year. As mentioned earlier, the super deduction relates to qualifying main rate plant and machinery, with examples including machinery, office desks and computer equipment etc.

You may only claim super deduction on assets up to the maximum Annual Investment Allowance (AIA) threshold. AIA ordinarily allows companies to claim 100% tax relief on qualifying plant and machinery assets, but with the super deduction, a 130% claim is in place up to the maximum annual investment threshold. The maximum threshold for AIA is currently £1,000,000 until December 2021, meaning that the super deduction may be claimed on assets up until the £1,000,000 threshold. As of January 2022, the maximum threshold for AIA is £200,000, so this is a factor to consider on when would be most beneficial for your business to purchase assets.

 The 50% first year allowance for special rate assets would allow relief at half of the qualifying cost in the first year. This is an increase from the previous 6% relief which was in place for special rate assets, which include assets with a long life (at least 25 years) and parts of a building which are considered integral etc.

Why introduce the Super Deduction Allowance?

With business investment levels falling by over 10% as a direct result of the COVID-19 pandemic, the Government have attempted to reverse this trend by introducing a generous capital allowance program, with the aim being to stimulate business investment within the UK. Increased investment tends to go hand in hand with economic growth, and so after no doubt some pretty complex calculations and modelling, the Government believe that this tax break will incentivise businesses to spend and thereby lift the economy.

 However, with corporation tax rates increasing on 1st April 2023 from the current 19% flat rate to a sliding scale of 19% to 25% corporation tax dependent on your company’s taxable profit, the timing of when you will purchase the asset is absolutely vital. If your business forecasts higher profits in the financial years in which corporation tax is rising to 25%, and believe that you are likely to be within the 25% bracket (details have yet to be released on the thresholds), you may be better served purchasing assets in these financial years instead of now. This is because even though the SDA is due to end on 31st March 2023, you would still be able to claim 100% AIA that would enable you to reduce company profits in that year with the new rate of corporation tax. This could be very useful in reducing what would be a higher corporation tax bill, but ultimately it boils down to what you believe will be more beneficial to your company; claiming 130% of qualifying expenditure now, or waiting to claim 100% of qualifying expenditure in the future to offset against profits that will be subject to higher tax rates.

 This is not a simply subject, and so if you require more specific guidance on how the SDA impacts you and your business, and how best to take advantage of this attractive capital allowance scheme, please don’t hesitate to get in touch with us and we’d be happy to help.