Super Deduction Tax – What is it and how does it work?

by | Aug 4, 2021 | Limited company

Recently announced in the Chancellor’s Budget 2021 was a new super deduction tax for limited companies that encourages investment in assets (and to part with their money!), along with additional capital allowance changes that were brought in, in the hope that it would kick start a recovery. 

As with most things announced in the budget, it’s not always easy to understand how it will affect your business, so we’ve got all the details you need to know here in easy to understand terminology.

What is the super deduction tax?

The super deduction tax is a new type of capital allowance, which means limited companies can use it to save tax by deducting the value of assets they purchase for their business from taxable profits. 

Deducting the value of qualifying assets purchased from profits to save tax is nothing new, but this super deduction allows limited companies to deduct a further 30% of their value – which will help save even more tax.

It’s only a temporary measure however, and is available from 1st April 2021 until 31 March 2023, and sole traders and partnerships don’t qualify unfortunately.

How does the super deduction tax actually work?

Any qualifying investments your limited company makes in new assets such as plant and machinery will qualify for a 130% capital allowance deduction.

Here’s a real world example of how the super deduction tax could work:

A company spends £150,000 on qualifying assets, and decides to claim the super deduction tax. 

By spending £150,000 on qualifying assets, the company can deduct £195,000 from its profits before tax (130% of the initial investment), leaving a smaller corporation tax bill.

Deducting £195,000 from taxable profits will save the company up to 19% of that – or £37,050 – on its corporation tax bill. 

Not too shabby!

What assets qualify for the super deduction tax?

Sadly, not all equipment purchased by limited companies will qualify. 

What we do know is that qualifying assets must be brand new and not used, and some examples of qualifying equipment are as follows.

This list is not exhaustive, and other assets may qualify.

  • IT Equipment
  • Solar Panels
  • Tractors, Lorries, and vans
  • Ladders & Tools
  • Cranes
  • Office Equipment such as desks & chairs
  • Electric Vehicle charging points
  • Refrigeration units
  • Compressors and foundry equipment

What assets don’t qualify for the super deduction tax?

Cars, shares, or residential property do not qualify. You can’t make claims on assets purchased as part of a property unless you acquire the property brand new, and directly from the developer.

Second hand or buy for rent equipment also doesn’t qualify. 

Purchases made under hire purchase do qualify as the business has purchased the asset outright, but is financing it’s purchase, whereas leasing an asset is a rental agreement and the limited company never owns the asset, and therefore leased assets don’t qualify.

What happens if assets purchased under the super deduction tax scheme are later sold?

If you later sell the assets purchased as part of the super deduction scheme, a tax charge called a ‘balancing charge’ will arise based on how much the asset was disposed of.

This is a charge based on how much the asset was disposed/sold for and how much it’s value is in the tax computation. So, if you got the 130% deduction at the purchase date (which means all of it’s value has been written off in the tax computation), but then sold it the next year, then the HMRC applies the balancing charge to claw back some of the relief given on that original purchase.

Where the super deduction has been claimed on the asset, the disposal value for the asset will be multiplied by 1.3 (to account for the additional 30% tax savings you originally were given) except where the disposal after 1st April 2023.

What other options are there if assets can’t get the super deduction?

Assets that fall outside of the qualifying assets rules, but are classed as ‘special rate assets’ and would normally get a 6% deduction, will be entitled to claim 50% of their value against their profits until 31 March 2023.

Special rate assets include:

  • parts of a building considered integral – including lifts, heating and cooling systems, and electrical and water systems.
  • items with a long life (usually 25 years or over)
  • thermal insulation of buildings
  • cars with CO2 emissions over a certain threshold

There is also the annual investment allowance (AIA) which gives all other assets (other than those that are specifically special rate assets) a 100% deduction up to a total investment value of £1 million per year – until 31 December 2021.

Tax planning opportunity!

As we’ve stated before, the super deduction tax is not available to partnerships and sole traders, so where a sole trader or partnership is considering making a large investment in qualifying assets, it may be a tax planning opportunity to consider incorporating to get the benefit of the super deduction tax.

However, businesses considering this must not forget that the rate of corporation tax is increasing from 19% to 25% in 2023 for businesses with profits of more than £250,000. 

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