How super is the Chancellor's super deduction?

Alongside plans for higher tax rates and long-term economic recovery, there was an unexpected positive announced in the 2021 Budget - the brand-new capital allowances “super-deduction”.

The deduction will allow UK companies to claim capital allowances at a 130% first year rate for money spent on qualifying plant and machinery investments. Ordinarily, companies would only be able to claim an 18% annual writing down allowance (WDA) for this kind of expenditure. In practice, this means a company spending £100,000 on qualifying assets would have £130,000 deducted against its taxable profits.

In addition, companies can claim a 50% first year rate deduction for qualifying special rate assets, such as long-life assets and integral features (which would otherwise receive a 6% annual WDA). This would mean a £50,000 deduction for every relevant £100,000 that’s spent. These super-deductions may significantly increase the total deductions a taxpaying business can claim, which reduce the amount of tax it pays on profits per chargeable period.

What’s more, the temporary increase in the annual investment allowance has been extended. It will remain available to claim for up to £1 million of qualifying expenditure incurred until 31 December 2021. Companies will also be able to access Enhanced Capital Allowances and an increased level of Structures and Buildings Allowances for investments within Freeport tax sites until 30 September 2026.

However, the devil is in the detail here. The super-deduction is only available to companies within the corporation tax regime and only applies to expenditure on new plant and machinery - not second hand or gifted items. Certain types of assets are excluded from the concession, including cars, assets for leasing and connected party expenditure. Also, the super-deduction will not be available to companies claiming the related structures and building allowance for work on non-residential structures and buildings.

Finally, the super-deduction isn’t a permanent concession. It will apply only to qualifying purchases (meaning an actual payment has been made) that happen between 1 April 2021 and 31 March 2023. Contracts entered into before 3 March 2021 will be excluded. To make the most of these allowances, it’s worth carefully considering the timing of any contractual arrangements and relevant company spend.

In spite of these caveats and restrictions, the super-deduction was a welcome announcement from the Chancellor. It may provide an unexpected boost to developers and others engaging new developments at a time when others are looking at tax hikes. We expect further detail on the super-deduction and other related tax changes will be announced on the Treasury’s designated “tax day” on 23 March.

If you’d like to know more about how these changes may affect your business, get in touch with TLT’s Corporate Tax team.

Contributor: Andree Parker 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.