Super-deduction tax break – what is it and how does it work?

Originally written by Timothy Adler on Small Business What is the super-deduction tax? The super-deduction £25bn tax break, announced in last Wednesday’s Budget, is intended to spur investment by providing 25p off company tax bills for every pound of qualifying spending on plant and machinery. How the super-deduction works The super-deduction offers 130 per cent first-year relief on qualifying main rate plant and Super-deduction tax break – what is it and how does it work?

Super-deduction tax break – what is it and how does it work?

Originally written by Timothy Adler on Small Business

What is the super-deduction tax?

The super-deduction £25bn tax break, announced in last Wednesday’s Budget, is intended to spur investment by providing 25p off company tax bills for every pound of qualifying spending on plant and machinery.

How the super-deduction works

The super-deduction offers 130 per cent first-year relief on qualifying main rate plant and machinery investments from April 1 2021 until March 31 2023 for companies.

For most business equipment, there will be a super-deduction of 130 per cent of the expenditure incurred. This will mean that on a spend of £100,000, the corporation tax deduction will be £130,000, giving corporation tax relief at 19 per cent on £130,000, which is £24,700.

Normally such expenditure would either fall within a company’s annual investment allowance and produce relief of only £19,000 or alternatively be tax-relieved at 18 per cent of the cost per annum.

Nigel May, partner at MHA MacIntyre Hudson, said: “Companies looking to use this relief will need to take care when the assets that the expenditure relates to are sold: tax charges may then arise clawing back the relief. It is perhaps worth noting that certain expenditure is excluded, in particular the acquisition of company cars.”

What equipment can I claim super-deduction against?

The kind of assets that qualify for the super-deduction include but are not limited to:

  • Solar panels
  • Computer equipment and servers
  • Tractors, lorries, vans
  • Ladders, drills, cranes
  • Office chairs and desks
  • Electric vehicle charge points
  • Refrigeration units
  • Compressors
  • Foundry equipment

Can I claim super-deduction if I use asset finance?

There seems to be some confusion here.

In the draft super-deduction legislation, plant and machinery investment incurred under “a hire purchase or similar contract” – common among small and medium-sized companies – will have to meet “additional conditions” to qualify for the super-deduction.

The implication is that the 130 per cent tax break excludes hire purchase or asset finance arrangements because the super-deduction only applies to “the person to whom [the equipment] is bailed or hired is the person who incurs the expense”.

According to the Times, more than one in five small and medium-sized businesses use asset finance or hire purchase when purchasing equipment.

Julien Rose of regulatory consultancy Asset Finance Policy said: “This really needs clarifying before the rules are confirmed … hopefully it will soon be confirmed that relevant leasing will qualify, as it has before.”

However, according to the Finance & Leasing Association, these “additional conditions” are precisely there to ensure that the benefit of the super deduction go to the business customer rather than the lender, and that does not mean hire purchase cannot be used.

Super-deduction additional conditions

  • that you are paying a periodical sum and in return plant and machinery assets are “bailed” (hired) to you
  • that eventually you can end up owning those assets (such as by exercising an option to purchase or paying a fee)
  • that the person who hires/receives the goods is the one incurring the expenditure (i.e. paying for the contract). This makes sure that the benefit of the deduction goes to the small business rather than the lender.

Simon Goldie, director of business finance at the F&LA, said: “There has been some confusion over the application of the super-deduction. In layperson’s terms, it benefits businesses whether they acquire equipment using cash or a hire purchase agreement.

“In the case of the latter, the legislation requires the person benefiting from the super-deduction to have ‘incurred the expenditure’ in acquiring the equipment, and as far as we understand it, this expenditure can include payments made under a hire purchase contract.”

The F&LA has asked HMRC for further clarification.

Further reading

Super-deduction tax break – what is it and how does it work?

Source : UK Small Businesses More