What is the super deduction tax rate of relief?
The UK government introduced an attractive and significant tax incentive on 3rd of March 2021, called super deduction, to help with the economic recovery from the COVID-19 pandemic.
This applies to companies who are investing in qualifying new plant and machinery assets from 1 April 2021 until 31 March 2023.
A super-deduction will be providing allowances of 130% (effective relief of 24.7% on cost) on new plant and machinery investments that ordinarily qualify for 18% main rate written-down allowances.
Examples of qualifying plants and types of machinery for super-deduction:
- Computer equipment
- Tractors, vans, lorries (Not Cars)
- Office chairs and desks
- Office equipment
- Electric vehicle charge points
Example for a super deduction claim:
If a company purchase an asset for 100K, without the super deduction – they can claim 100% (AIA) of the asset value to get the tax relief. Since a company pays 19% corporation tax – tax relief would be 19k.
But, with the super deduction- they can claim 130% of the assets assessed value to get the tax relief. So, it would be 24.7k.
An expenditure will qualify if it only fulfils the below criteria:
- The capital expenditure should be incurred on or after 1 April 2021 but before 1 April 2023.
- A company should incur it within the charge to corporation tax.
- It should be an expenditure on assets that are unused and not second-hand.
- It is not within any of the general exclusions in section 46(2) of CAA 2001.
- It is not an extraordinary rate expenditure, and it is not expenditure on the provision of plant or machinery for use wholly or partly for a ring-fence trade.
Expenditure that excluded from claiming the super deduction
- The contracts are entered before 3 March 2021, even if spending is incurred between 1 April 2021 and 1 April 2023.
- If payment is incurred in the chargeable period in which the qualifying activity is permanently discontinued.
- If it is a used and second-hand asset.
- The general exclusions at S46 will apply.
- If it is a car or on building and structures
- If it is assets held for leasing.
- Special rate assets.
- Residential property
How to calculate super deduction
There is no limit to claim the super-deduction, unlike with AIA, and it’s possible to carry forward if the benefit is greater than the corporation tax savings earlier.
The super-deduction rate will be apportioned based on days falling before 1 April 2023 over the total days in the accounting period.
Reduced super-deduction is applicable when an expenditure is made between 1 April 2021 and 1 April 2023. Still, the relief claimed in chargeable periods that end on or after 1 April 2023 regarding an additional VAT liability is regarded as a super-deduction expenditure.
The relevant percentage for Reduced super-deduction can be calculated as below.
It’ll be an X% where X is determined by;
- Dividing the total number of days in the relevant period before 1 April 2023 by the total number of days.
- Multiplying that amount by 30 and adding 100 to the result.
Example: If a company has a 12-month accounting period ending on 30 September 2023;
- It is dividing the total number of days in the relevant period before 1 April 2023, which is 183 days, by the total number of days in that period which is 365.
- Multiplying that amount by 30 will result in – 183/365*30 = 15, and adding 100 to the result will give 115%, which can be claimed.
Disposal of assets where super-deduction made
When disposal occurs for an asset where the super-deduction was made, the person who incurred relevant super-deduction expenditure is liable to a balancing charge for the chargeable period in which the event occurs.
The amount of the balancing charge is the relevant proportion of the disposal value of the plant or machinery.
The relevant proportion is determined by dividing the amount of pertinent super-deduction made regarding the assets by the total capital expenditure.
SR allowance (50% first-year allowance)
The SR allowance (Special rate allowance) works similarly to super-deduction. But here, we calculate your tax savings on extraordinary rate pool expenditure.
You can claim this If the asset doesn’t qualify for first-year allowances, or you have reached the annual Investment allowance (AIA) limit, or the purchase isn’t eligible for AIA.
Example for SR allowance calculation:
If a company purchase an asset for 100K on an investment that doesn’t qualify for the main pool, we can claim the special rate allowance.
In the first year, the SR allowance gives you a tax relief of 50k to offset your corporation tax profits. This will result in a net tax deduction of 9.5K.
Are there any anti-avoidance rules?
Yes, if a contract is already in place- cannot be cancelled and then put into place again on or after 1 April 2021 to achieve the new super-deduction.
Should businesses consider incorporating to claim super-deduction?
Yes, Super-deduction is not available for sole traders and partnerships. In other words, any business which pays Corporation Tax is eligible for the super-deduction.
Do assets on hire purchase qualify for the super-deduction?
Yes, super-deduction can be claimed – 130% for main rate plant and machinery and 50% for extraordinary rate expenditure.
Can we claim super-deduction if we use asset finance?
Some special rules apply to assets acquired for leasing out under a finance lease. In these cases, your company makes payments to purchase an investment, and the super-deduction should be available to you –the legal ownership of the asset at some point will be passed to you.
What about tax losses?
Like other capital allowances, any deductions that you cannot use in the current year can be carried forward to future years.
Super-deduction is an attractive and significant incentive to invest in your company is likely to be profitable from 1 April 2021 till 31 March 2023. It creates an opportunity to claim super tax relief on large development projects in the short term.
Also, it’s best to remember that the corporation tax rate is increasing from 19% to 25% in 2023.