In this year’s Budget, Rishi Sunak, Chancellor of the Exchequer, announced the new Super Deduction Allowance, as part of the Finance Bill 2021, whereby businesses are able to claim for any expenditure they’ve incurred on new fixed assets of plant and machinery.

The new allowance is only for the actual expenditure incurred between 1st April 2021 and 31st March 2023 (under a construction contract from 3rd March 2021) and is in the form of relief of 50% in the first year of the qualifying expenditure.  However, this new tax deduction is only applicable to companies and corporation tax.  This means that sole traders, partnerships and LLPs lose out.

The new super deduction allowance is applicable alongside the existing Annual Investment Allowance (AIA), which remains at £1 million per business in 2021, although the AIA will return to £200,000 with effect from 1st January 2022.

What expenditure qualifies for the new tax allowance?

This new tax deduction for companies is only available for new plant and machinery whereby the normal 18% written down allowance is applicable.  According to HMRC’s guidance, the plant and machinery that qualifies for the deduction includes:

Items you keep for business use

  • The costs for demolishing plant and machinery
  • Some fixtures, such as fitted kitchens or bathroom suites
  • Building alterations to install other plants and machinery, but not including repairs.

How much is the tax relief?

In total, the new super deduction allowance provides tax relief up to 130% of the qualifying expenditure, in comparison to the 18% written down allowance for plant and machinery.  It is also deductible against corporation tax in the year the fixed asset was bought, enabling companies to reduce their tax bill by as much as 25p per £1 invested.  In addition, there is no cap to the level of capital investment that qualifies for the new tax allowance.

However, if the expenditure that qualifies for the super deduction allowance goes beyond 1st April 2023, the amount of tax relief will be reduced and is replaced by either:

  • The relevant percentage defined by the sub-section, if the company incurs an additional VAT liability before 1st April 2023, or
  • 100% if the additional VAT liability is incurred on or after 1st April 2023.

What is the Special Rate Allowance?

As well as the new super deduction allowance, there is also the special rate allowance which is applicable to new plant and machinery that includes integral features in a building, as well as lifelong assets.  The special rate allowance tax relief is 50% of the qualifying cost in the first year, and the remaining balance is subject to the normal special rate to be written down at 6% in future years.

What if I sell the plant and machinery after I’ve claimed the tax relief?

For companies that later dispose of the plant and machinery on which they claimed the super deduction allowance of the special rate allowance, they will be liable for a charge on the balance over the chargeable period.  For example, the balancing charge is disposal value multiplied by a relevant factor, which is dependent on the following when the asset is disposed:

  • If the asset is disposed of in a chargeable period that ends before 1st April 2023, the relevant factor is 1.3
  • If the asset is disposed of before 1st April 2023 but the transaction doesn’t complete until after that date, the relevant factor of 1.3 is amended based on an apportionment of the number of days over that total period
  • If the asset is disposed of in a chargeable period after 1st April 2023, the balancing charge will be calculated as disposal proceeds.

For more information on how the super deduction allowance or the special rate allowance may affect your company, or to find out if you qualify for the new tax relief, contact HB Tax today.

At HB Tax, we provide professional advice and services covering all aspects of taxation for sole traders, partnerships, LLPs and limited companies.  As members of the Chartered Institute of Taxation, you can rest assured that our experience and knowledge is of the highest quality.  Our friendly, highly-approachable team is able to help you with tax advice, probates, accounting, legal support and corporate finance.  Contact us today to get your financial affairs in order.