During the budget in March 2021, it was announced that Limited Companies would be able to take advantage of a new tax relief that allows them to claim £130 of tax allowance on every £100 spent on qualifying plant and machinery expenditure –with no upper limit on the amount of claim up until 31 March 2023, the so called “super-deduction”.
This means that a company paying corporation tax at the rate of 19 percent will achieve £25 of tax reduction for every £100 spent in the tax year of expenditure.
Unfortunately, the super-deduction is not available for individuals, partnerships, or LLPs. Although, these businesses will still be able to take advantage of the Annual Investment Allowance (AIA) that gives 100 percent tax relief on up to £1m of expenditure until 31 December 2021, when the allowance is scheduled to drop down to £200,000.
Another pitfall of the super-deduction is that it only relates to expenditure on new and unused equipment. Purchases of second-hand equipment do not qualify but these can still benefit from the AIA.
The super-deduction is also currently not available on leased equipment. This was a blow for plant hire companies who generally invest heavily in new equipment annually. Proposals have been put forward to amend this through the finance bill.
In addition, when an asset that has been subject to a super-deduction claim is subsequently disposed of, 130 percent of the proceeds are then taxed. With corporation tax rates expected to increase, the tax costs on disposal could be significant.
Overall, the super-deduction could give companies a significant cash-flow advantage in the short term. However, it is not always as beneficial as it seems, and companies need to be aware that it could be more costly in the long term.