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Capital Allowance Deductions -what you need to know

The new capital allowance, christened the “Super Deduction”, offers a tax deduction equal to 130% of expenditure on new unused plant & machinery (P&M) between 1 April 2021 and 31 March 2023. 

It only applies to companies that purchase assets that would otherwise belong in the main capital allowances pool. Assets that would qualify for the special rate pool do not get the same uplift in the qualifying expenditure. Instead, they get a 50% initial allowance (the ‘SR allowance’) followed by the normal writing down allowances.

The super deduction and SR allowance are only available to companies subject to corporation tax, not individuals, partnerships or LLPs, and only where the contract for the plant and machinery (including fixtures installed under a construction contract) was entered into after 3 March 2021 and expenditure is incurred after 1 April 2021.

So what assets qualify?

Most tangible capital assets used in the course of a business are considered plant and
machinery for the purposes of claiming capital allowances.
There is not an exhaustive list of plant and machinery assets. The kinds of assets which may
qualify 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

Although not all business investments will qualify for the new allowances, the qualifying groups are quite wide:

However, it is important to remember that certain assets do not qualify for the main pool (for example, cars  have their own capital allowance rates) and that second hand assets will just go into the pools as normal.

In addition, the new capital allowances do not apply to assets that fall into the relevant pools but are used for leasing. Therefore, expensive machinery acquired by hire businesses will not qualify.

What is the tax relief then?

The super deduction gives relief at 130% of the qualifying cost compared to the usual 18% writing down allowance for investment in main pool plant and machinery assets. The SR allowance gives relief at 50% of the qualifying cost in the first year with the balance going into the normal special rate pool to be  written down at the usual 6% rate in future years.

For all companies that can claim it, the super deduction will be more beneficial than claiming the AIA for a main pool asset purchases.

However, for smaller companies it may still be beneficial to claim the AIA in the first instance rather than the SR allowance on relevant assets, e.g. integral features, unless the total expenditure on special rate pool assets exceeds the AIA threshold of £1m.

Here is a table which summarises the corporation tax relief available for main plant and machinery (qualifying for the super deduction relief):

CA ClaimAsset typeCA rateEffective relief of cost in Year 1
Super deductionNew130%24.7%
AIA (max £1m)All100%19%
Main pool2nd hand18%3.42%

Computational factors

Apart from the enhanced expenditure, another positive aspect of the super deduction is that there is no cap, unlike with the annual investment allowance (AIA).

The 30% uplift to expenditure tapers off where a financial year straddles 31 March 2023. A lower composite rate will apply that will reduce the amount of uplift. For this reason, if your company’s financial year end is approaching, accelerating your expenditure plans may deliver greater corporation tax savings.

Delay to save

Conversely, if spending plans for plant & machinery are nearer to the 31 March 2023 super deduction end date, and you expect to have profits subject to the new 25% corporation tax rate (which applies from 1 April 2023), it may be better to delay purchases until after that date, when the tax saving may be greater. It’s all in the timing.