How to utilise Capital Allowances & the Super-deduction | Expert advice

Capital Allowances & the Super-deduction

For some considerable time, there have been tax incentives to encourage UK businesses to invest in plant and machinery and in turn grow the economy.

  • For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery.
  • Under the super-deduction, for every pound a company invests, their taxes are cut by up to 25p

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The new Capital Allowances offer

As a result of measures announced in the 2021 Budget, businesses will now benefit from four significant capital allowance measures:

  • The super-deduction – which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies
  • The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies
  • Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold, until 31 December 2021 for all businesses
  • From 1 January 2022, all businesses can claim AIA relief up to £200,000.

Why is the government introducing a super-deduction?

  • Since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and Q3 2020.
  • Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.
  • Making capital allowances more generous works to stimulate business investment. As a result, these measures can promote economic growth and counter business cycles.
  • The super-deduction will give companies a strong incentive to make additional investments, and to bring planned investments forward.

What are capital allowances?

  • Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax-deductible. Businesses deduct capital allowances when computing their taxable profits.
  • In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation but can instead deduct capital allowances. For example, a corporation tax paying company with accounting profits of £1,000, depreciation expense of £200, and total capital allowance claims of £300 would make the following adjustment:
    • Add £200 (depreciation expense) to £1,000 (accounting profits) = £1,200
    • Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits)
    • Apply the appropriate tax rate, e.g., corporation tax at 19%: £900 x 19% = £171 tax due
  • The two main types of capital allowances are:
    • Writing Down Allowances (WDAs) for plant & machinery – covering most capital equipment used in a trade; and
    • Structures and Buildings Allowances (SBA) – covering the construction and renovation of non-residential structures and buildings.
  • The 130% super-deduction and 50% first-year allowance are generous brand-new capital allowances for investments in plant and machinery assets. Both will allow investing companies to lower their corporation tax bills.

What is plant and machinery?

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 for either the super-deduction or the 50% FYA 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 and machinery
  • Foundry equipment

Click here to read HMRC’s Manual Capital Allowance guidance

More detail on the eligibility of different types of investments for different types of capital allowances is set out in the table below.

*Please note that the table is only visible on desktop or tablet versions of this page.*

Capital Allowances Machinery
Plant & Machinery Structures & buildings
Bought new Bought 2nd hand Assets held for leasing Main rate assets Special rate assets New disposal Rules
Super-deduction (130% FYA) Y Y Y N/A
Special Rate FYA (50% FYA) Y Y Y N/A
Annual Investment Allowance (100% up to £1m) Y Y Y Y Y N/A
Writing down allowances (18%) Y Y Y Y N/A
Writing down allowances (6%) Y Y Y Y N/A
Freeports (100% ECA, uncapped) Y Y Y N/A
Structures & Building Allowance (3% pa) N/A Y
Freeports (SBA 10pa) N/A Y

Examples of the super-deduction in practice

Example one

  • A company incurring £1m of qualifying expenditure decides to claim the super-deduction
  • Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits
  • Deducting £1.3m from taxable profits will save the company up to 19% of that – or

£247,000 – on its corporation tax bill.

Example two

Previous System 

  • A company spends £10m on qualifying assets
  • Deducts £1m using the AIA in year 1, leaving £9m
  • Deducts £1.62m using WDAs at 18%
  • Deductions total £2.62m – and a tax saving of 19% x £2.62m = £497,800

With Super-deduction 

  • The same company spends £10m on qualifying assets
  • Deducts £13m using the super- deduction in year 1
  • Receives a tax saving of 19% x £13m = £2.47m

Example two

Previous system With super-deduction
- A company spends £10m on qualifying assets - Deducts £1m using the AIA in year 1, leaving £9m - Deducts £1.62m using WDAs at 18% - Deductions total £2.62m – and a tax saving of 19% x £2.62m = £497,800 - The same company spends £10m on qualifying assets - Deducts £13m using the super- deduction in year 1 - Receives a tax saving of 19% x £13m = £2.47m

Further Support

If you require any advice regarding Capital Allowances or tax planning in general, then please do contact us.

We will continue to support our clients throughout these uncertain times and provide further information when we can. Additionally, if you have any queries on any of the information provided above, or if you require any further support, please get in touch with Martin Garrity by calling us 0113 257 4506.