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April 26th 2021

The capital allowances "Super Deduction" - it's all in the timing

In the Budget, the Chancellor made a splash with his ‘super deduction’ for new equipment. However, closer analysis has revealed that it might not be as attractive as first thought.

Key points

The new capital allowance, christened the "Super Deduction", offers a tax deduction equal to 130% of expenditure on new unused plant & machinery (P&M) between 1 April 2021 and 31 March 2023. It only applies to companies that purchase assets that would otherwise belong in the main capital allowances pool. Assets that would qualify for the special rate pool do not get the same uplift in the qualifying expenditure. Instead, they get a 50% initial allowance (the ‘SD allowance’) followed by the normal writing down allowances.

Computational factors

Apart from the enhanced expenditure, another positive aspect of the super deduction is that there is no cap, unlike with the annual investment allowance (AIA). This means from 1 January 2022 when the AIA is due to revert to £200,000, the super deduction will be even more valuable to companies spending more than the AIA limit.

The 30% uplift to expenditure tapers off where a financial year straddles 31 March 2023. A lower composite rate will apply that will reduce the amount of uplift. For this reason, if your company's financial year end is approaching, accelerating your expenditure plans may deliver greater corporation tax savings.

Delay to save

Conversely, if spending plans for plant & machinery are nearer to the 31 March 2023 super deduction end date, and you expect to have profits subject to the new 25% corporation tax rate (which applies from 1 April 2023), it may be better to delay purchases until after that date, when the tax saving may be greater. It's all in the timing.

Conclusion

In order to ensure maximum tax efficiency, accounting dates, a variable rate of super deduction, and corporation tax rates all need to be considered in some serious number crunching.

Scholes CA can help you optimise your expenditure plans and avoid excessive tax bills, by helping you to identify appropriate timings for your expenditure plans - give us a call today for assistance.

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