The reality of the super-deduction

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. What do you need to know when advising clients?

Key points:

The new Capital Allowance (CA), christened the super-deduction, offers a tax deduction equal to 130% of expenditure on new unused plant and 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 CAs main rate. Assets that would qualify for the special rate pool don't get the same uplift in the qualifying expenditure. Instead they get a 50% initial allowance (the "SD allowance") followed by a normal writing down allowances.

Computational factors:

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

Tip - If a client's financial year end is soon, advise them to bring forward expenditure on P&M that they had planned for the following financial year. This will give them the benefit of the greater corporation tax (CT) savings earlier.

Delay to save:

Conversely, if a client's spending plans for P&M are nearer to the 31 March 2023 super-deduction end date, they should consider delaying purchases until after that date where they expect to have profits subject to the new 25% CT rate which applies from 1 April 2023. The tax saving would be greater that way. Considering accounting dates, a variable rate of super-deduction and CT rates, some serious number crunching is required to ensure maximum tax efficiency.

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