Super-deduction FAQ

Super-Deduction FAQ

What is the super-deduction allowance?

The super-deduction allowance is the most attractive tax incentive for business investment ever offered by UK government – here’s how it can help your business accelerate its journey to net zero.

In his budget speech in March 2021, Chancellor Rishi Sunak announced a generous new tax allowance, called ‘super-deduction’, that permits companies to claim up to a 130% deduction against profits for qualifying plant and machinery purchased between 1 April 2021 and 31 March 2023.

This is accompanied by a first-year allowance (FYA) of 50% on other qualifying special rate assets that ordinarily qualify for 6% special rate writing down allowances.

The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest in new plant and machinery assets.

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How does this work in practice?

If you spend £100,000 on qualifying equipment, you could be looking at savings of £24,700. Here’s how that works: Let’s say your business spends £100,000 on qualifying equipment, such as solar panels. When you calculate your taxable profits your corporate tax deduction will be £130,000 (which represents 130% of your initial investment). Deducting £130,000 from your taxable profits will save your business up to 19% (the current rate of corporation tax) of that. So 19% of £130,000 = £24,700, which is how much corporation tax you would save using the super-deduction allowance.

Normally, investment in new plant and machinery assets would only be eligible for a ‘writing down allowance’ (WDA), which is set at 18%. Using the above example, a company would save just £3,420 through a WDA, so the savings available through the super-deduction scheme are significant.

What is the purpose of super-deduction?

Compared to our European counterparts, business investment within the UK has been historically weak since the economic crisis of 2008 – something that has worsened since the onset of the COVID19 pandemic. Additionally, the government has set the ambitious UK target of achieving net zero by 2050. Hitting this goal will require energy-saving efforts from all businesses across every industry.

The super-deduction allowance is therefore designed to stimulate economic recovery, improve the country’s productivity and drive investment into energy efficiency. This should in turn lead to more corporate profits for the government to tax in 2023, when the corporation tax rate is set to rise from 19% to 25%.

What assets qualify for the super-deduction allowance?

The allowance applies to all new plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances. Or, as HMRC says, “Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances. This includes items such as office furniture, tools and refrigeration units, but also notably those associated with energy efficiency improvements, including:

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Solar panels Energy storage solutions LED lighting Electric vehicle ports Combined heat and power (CHP) systems

Can I claim super deduction alongside a hire purchase agreement?

Yes. From a tax perspective a hire-purchase agreement offers the same tax allowances as if the asset is bought outright.

Could my business save money through the First Year Allowance (FYA)?

Both the super-deduction allowance and FYA are available alongside the ongoing Annual Investment Allowance (AIA) which already gives 100% relief for costs of qualifying plant and machinery in the tax year of purchase. In other words, you can deduct the full value of an item that qualifies for AIA from your profits before tax. The AIA has been set at £1 million per business up to 31 March 2023.

Since the FYA sits at 50%, it makes sense for businesses to allocate the AIA against their first £1 million of special rate assets, since you can claim a 100% deduction rather than 50%.

Are there any exclusions to the super-deduction allowance?

Super-deduction can only be made by entities subject to corporation tax so this means that sole traders, LLPs and partnerships will miss out. Additionally, all assets being purchased must be new and unused. However, there are no limitations on the company size, nor on the sector or industry in which the company operates.

It’s also worth noting that while vans and lorries are eligible for the allowance, cars (and electric vehicles) are not. EV charge ports are eligible, however, which is good news for the growing number of executives who say electrifying their business fleet is a primary strategy in cutting emissions. HMRC’s technical specifications and full exclusion list can be found here.

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How can the super-deduction allowance help my business save on energy costs?

Sustainability is becoming an increasingly important consideration for businesses of all shapes and sizes. Not only does demonstrating green credentials stand you in good stead with customers, investors and shareholders, but the government’s net zero targets mean that soon organisations will be obligated to show that they’re taking action on their environmental impact.

Additionally, energy is only set to become more expensive and volatile in the future, so forwardthinking businesses need to take steps now to guard against these forthcoming risks.

Energy investments such as combined heat and power (CHP), solar panels, electric vehicles and LED lighting are sensible options to consider, enabling businesses to reduce their dependency on the national grid, use less energy and drive down their carbon footprints. The super-deduction allowance can be used for all of these technologies and more, helping to mitigate some of the costs involved in the initial outlay.

And don’t forget, many of these systems pay for themselves within relatively short timeframes, after which businesses can continue to enjoy fewer regulatory pressures, enhanced sustainability credentials, lower bills and other financial benefits arising from energy efficiency grants and incentives.

What does super-deduction mean for my business specifically?

Not sure how the super-deduction allowance could benefit your company’s sustainability ambitions?

Get in touch. As a specialist energy solutions finance company, we can help make sense of it for you.

Contact Us 0207 371 5360 info@advantageutilities.com www.advantageutilities.com The Coda Studios, 189 Munster Road, London, SW6 6AW

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