What Is Super Deduction and How Can It Help You?

During the current period of economic uncertainty due to the ongoing COVID-19 pandemic, the April 2021 budget was always expected to announce additional measures to support struggling businesses. Rishi Sunak announced an entirely new allowance ‘Super Deduction’ to help encourage business to invest in qualifying plant and machinery. The idea of the Super Deduction Capital Allowance is to encourage investment, which in turn will help British businesses to become more competitive in the International market. 

What is Super Deduction Capital Allowance

Super Deduction is a new allowance that is available to incorporated companies in the UK; this is important to note as it cannot be used by sole traders or partnerships. The super deduction allowance offers tax relief against corporation tax, which is only payable by incorporated companies. Essentially any business that utilises this new allowance can cut their corporation tax bill by 25p for every £1 worth of investment they make – it is worth noting that the investment must be on a qualifying asset. 

These new measures are available for use from 1st April 2021 until 31st March 2023. Super deduction has two elements:

  1. 130% super-deduction capital allowance for plant and machinery
  2. 50% first year allowance for qualifying special rate assets 

When calculating profit, and subsequently the corporation tax amount owed, the new Super Deduction allowance can be used to write off the cost of qualifying assets against taxable income. In accounting terms, this replaces accounting deprecation, which would not normally be tax deductible. 

Essentially this means that the purchase of a qualifying asset worth £10 million can be offset against corporation tax to the value of £13 million. The resulting tax saving would be £2.47m, compared to around £498,000 of deductions before the introduction of the super deduction allowance.  Asset finance can help with the upfront cost of the purchase, find out more about the asset finance broker service available at MC Commercial finance.

Eligible Assets for Super Deduction

Assets are a major cost for businesses; and can make the difference between success and failure particularly in the manufacturing, engineering and transportation sectors.  Most tangible items purchased for business use are classed as an asset and would be eligible for the super-deduction capital allowance. Examples include, but are not limited to:

  • Computer equipment
  • Vehicles – tractors, lorries, vans
  • Ladders, drills, and other tools
  • Construction plant e.g. diggers
  • Manufacturing equipment
  • Refrigeration units
  • Solar panels
  • Office furniture

Brand-new assets are eligible for super deduction however, purchases of second-hand equipment do not qualify. If you are purchasing an asset with the intention of leasing it out, this would also exclude it from super deduction allowances. For more guidance and information on what can be classed as plant and machinery specifically for super deduction please see government publications.

Why Is Investment Being Encouraged

Investment in plant and machinery is seen as integral to successful business. However, levels of investment within UK business have been chronically low for many years, leading to a lack of competition with International competitors. COVID-19 and the resulting economic impact has reduced those already weak levels of investment even further. 

By investing in updated technology, plant and machinery businesses can become more productive and profitable. This in turn makes them more competitive stimulating growth, further investment and ultimately an upturn in the wider economy. It may appear counterintuitive for the government, that is heavily in debt due to the pandemic, to be reducing their corporation tax income; however, longer term benefits of economic growth are expected to override these short-term costs. 

How Can Super Deduction Help Your Business?

Super Deduction can help you to invest in the growth and development of your business. Here are some key points:

  • This scheme will run for two years. 
  • Enables a 130% super deduction against corporation tax
  • Special rate assets will benefit from a lower 50% tax relief rate

Under normal tax circumstances there would be no financial incentive to invest in your business. Following on from the pandemic, it may initially seem unwise to make large invests in new plant or machinery. However, now may be the perfect time to either bring forward previously planned investments or to consider how to best utilise the Super Deduction allowance to replace aging assets or invest in new technology to actually grow your business. 

Asset Finance at MC Commercial Finance

Here at MC Commercial Finance, we can help you to find the most suitable asset finance product to support the purchase of plant, machinery and other essential assets for your business. Contact us today, and benefit from not only the new super deduction allowance when purchasing an asset, but also a fantastic asset finance deal to ensure the future growth and success of your business.