What qualifies for the super-deduction?

Mar 17, 2022 | Tax

There has arguably never been a better time than now for UK companies to invest in new plant and machinery than now.

Back in his Spring Budget on 3 March 2021, Chancellor Rishi Sunak announced a ‘super-deduction’ to encourage directors to bring forward investment plans.

The policy, which is the first of its kind to offer capital allowances relief at a rate above 100%, is also designed to boost productivity and aid the UK’s economic recovery from the COVID-19 pandemic.

“Making capital allowances more generous works to stimulate business investment,” the Treasury said last year. “As a result, these measures can promote economic growth and counter business cycles. 

“The super-deduction will give companies a strong incentive to make additional investments, and to bring planned investments forward.”

What is the super-deduction?

If your company invests in qualifying new plant and machinery assets before 31 March 2023, you will receive a 130% first-year capital allowance.

These would ordinarily qualify for the main writing-down allowance of 18%, so the tax advantage of the super-deduction should be plain to see.

In practice, the super-deduction essentially allows you to reduce your corporation tax bill by up to 25p for every £1 you invest in qualifying assets. 

For instance, if you were to invest £100,000 in qualifying assets, you will be able to deduct £130,000 (130% of the initial investment) when you calculate your taxable profit.

Deducting £130,000 from this would then save your company up to 19% of your investment – £24,700.

If you had invested under the previous system before 1 April 2021, you would have only been able to deduct up to £1m using the annual investment allowance and use the 18% writing down allowance.

You would then save 19% of the total. Even if we assume you were able to invest in assets above £1m to qualify, the tax saving under the normal system is typically less substantial than the super deduction.

What qualifies for the super-deduction?

You can only claim the super-deduction on qualifying plant and machinery assets you purchase for use in your company before 31 March 2023.

HMRC gives a rather broad definition of plant and machinery – “items you keep to use in your business”.

These include, but is not limited to:

  • items you use in your business, including vehicles
  • integral features, such as air-conditioning and electrical systems
  • fixtures, such as fitted kitchens and bathroom suites.

You can also claim for the costs of installing and demolishing existing plant and machinery. 

However, there are certain things that you might think count as plant and machinery which actually don’t, including:

  • items you lease
  • buildings, including doors, gates, shutters, mains water and gas systems
  • land and structures, such as bridges, road and docks
  • items used only for business entertainment.

You can only claim for items in residential property if you run a furnished holiday let business or the item is in the common parts of a residential building.

There are special rules for plant and machinery investment for care homes.

Does my investment qualify for the super-deduction?

If you entered into a contract before 1 April 2021, you will not qualify for the super-deduction, regardless of when the payments are made.

This is a specific piece of anti-avoidance legislation that gives HMRC the power to penalise a company if it finds it claimed the relief when it entered into the contract before 1 April 2021.

Furthermore, if you make an investment in 2023 and your end-of-year date is after 1 April, you will not get the full 130% deduction, though you may get a portion.

Talk to us about your investments and the super-deduction.

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