The New Super-Deduction, Explained

16 March 2021

At the current Corporation Tax rate of 19%, the super-deduction means that for every pound invested a company’s taxes are cut by up to 25p.

advice : COVID-19, Policy and Tax

As announced in the Budget on 3rd March 2021, for the next two tax years starting 1 April 2021, companies will benefit from a 130% “super-deduction” on qualifying plant and machinery investments.

At the current Corporation Tax rate of 19%, this means that for every pound invested a company’s taxes are cut by up to 25p.

Why is the government introducing a super-deduction?

The COVID-19 pandemic has caused business investment to decrease 11.6% YOY in Q3 2020. This drastic fall comes in a time of historically low levels of business investments, which have been one of the causes of the productivity growth slowdown since 2008, according to policy papers available on Gov.uk.

The super-deduction is a clever solution from the Treasury, as it acts as a stimulus measure to fuel the economic recovery from the pandemic. At the same time — with Corporation Tax set to increase to 25% in 2023 — the measure discourages business owners from maximising their profits at a lower tax rate for the next two years without reinvesting, which would stall the UK economy.

Also, only a few months after securing the Brexit deal, this change makes the UK’s capital allowance regime more internationally competitive, lifting the net present value of our plant and machinery allowances from 30th in the OECD to 1st.

What are capital allowances?

Capital allowances allow taxpayers — usually business owners or self-employed — to write the cost of certain assets against their taxable income.

For businesses, these can be deducted when computing taxable profits.

When working out taxable profits from accounting profits, businesses usually have to “add back” any depreciation on their assets. One of the purposes of capital allowances is to balance depreciation by reducing taxable income.

What is qualifying plant and machinery?

As per Gov.uk, the super-deduction applies to “qualifying plant and machinery” investment.

For capital allowance purposes, most tangible assets used in a business’s operation are considered plant and machinery. However, according to a HM Treasury factsheet, only the “main rate” assets qualify for the super-deduction.

These include, but are not limited to:

  • Computer equipment, servers and other electronic and IT devices;
  • Office chairs and desks;
  • Vehicles that are used exclusively for work including cars, vans, lorries, tractors…
  • Any machinery necessary to the manufacturing of your product or to the delivery of your service;
  • Tools that you use to carry out your job. Anything from drills to ladders and cranes;
  • Some energy equipment such as solar panels or electric vehicle charge points;
  • In some cases, the cost of demolishing existing plant and machinery.

What does not qualify?

According to the policy paper, so-called “special rate assets” do not qualify for the super-deduction.

We know from existing capital allowances, such as the Annual Investment Allowance, that non-qualifying assets include:

  • structures and buildings;
  • parts of a building considered integral — known as integral features:
    • lifts, escalators and moving walkways;
    • space and water heating systems;
    • air-conditioning and air cooling systems;
    • hot and cold water systems (but not toilet and kitchen facilities);
    • electrical systems, including lighting systems;
    • external solar shading.
  • items with a long life;
  • thermal insulation of buildings;
  • cars with CO2 emissions over a certain threshold;
  • second hand items;
  • items you purchased in order to lease to third parties.

While ineligible for the super-deduction, special rate assets qualify for the 50% first-year allowance, meaning that 50% of their value can still be deducted from taxable income.