In the 2021 budget the Government announced the introduction of a temporary capital allowance super-deduction. This is a beneficial tax deduction in the year of purchase of qualifying equipment, aimed at encouraging businesses to make investments now, to help stimulate economic growth. Set out below are the main qualifying conditions and the potential tax savings available.
Who is eligible to claim?
The deduction is only available to limited companies, not partnerships, LLPs or sole traders.
What qualifies?
Most new plant and machinery purchases such as, tractors, cultivating and harvesting equipment will qualify for relief at 130% of the purchase price.
A first-year allowance of 50% is available on special rate qualifying assets; for example, solar panels, electrical and water systems integral to a building.
There is no cap on expenditure for the super-deduction, unlike the annual investment allowance (AIA) which is currently capped at £1 million, dropping to £200,000 from January 2022.
When?
The relief covers expenditure between 1 April 2021 until 31 March 2023.
What is excluded?
There are a number of specific exclusions from the relief including:
- Cars
- Building and structures
- Second-hand equipment or equipment used for leasing
What are the tax savings?
| Plant and equipment |
Rate |
Tax saving per £1 spent |
Type of expenditure |
| Super deduction |
130% |
24.7p |
New |
| AIA (£1 million cap) |
100% |
19p |
New and second hand |
| Main pool |
18% |
3.42p |
Second hand |
| Special rate |
| Super deduction |
50% |
9.5p |
New |
| AIA (£1 million cap) |
100% |
19p |
New and second hand |
| Main pool |
6% |
11.4p |
Second hand |
What should be considered?
- Should you buy new equipment rather than second hand?
- When should the acquisition be made?
- Is the planned capital expenditure likely to exceed the AIA limit?
- If the relief for capital expenditure leads to a tax loss, how should this be relieved?
In summary
For limited companies, there is a two-year window of opportunity in which to benefit from the super-deduction which ends 31 March 2023. However, as one of the qualifying criteria for expenditure on plant and equipment is that it needs to be new, rather than second hand, you should establish if the increased cost and benefit of buying new is covered by the additional relief you will receive.
Plan the timing of capital expenditure to make the best use of the allowances available, including AIAs. There is the added complication of the reduction in AIAs from 1 January 2022 to add into the mix. The actual AIA relief available will depend on your accounting year end as well as the date of the expenditure. For example, if your year end is 31 March and all your capital expenditure takes place between 1 January 2022 and 31 March 2022, the maximum AIA available to you would be £50,000.
Where the super-deduction results in a tax loss, this can be carried back against profits of the last three years, subject to a £2 million cap giving a 19% tax deduction. Alternatively, the loss can be carried forward against future profits where there is potential for a corporation tax saving of 19, 25 or 26.5%, depending on the profit level of the company.