A new tax incentive for companies.
Perhaps the most innovative give-away in the recent budget was “Super-deductions for investment expenditure”.
What does this mean?
Companies that invest in qualifying plant and machinery in the period from 1 April 2021 to 31 March 2023 will benefit from enhanced capital allowances. Investments in assets that qualify for the main rate of capital allowances of 18% will benefit from a 130% first-year allowance. This means that for every £100 that you spend, you can deduct £130 in computing your taxable profits. This is equivalent to a tax saving of 24.7%.
What this does not mean?
What this change does not mean is the notion that you can deduct 130% of the cost of a qualifying purchase from your tax bill. The deduction is made from your company’s taxable profits.
For example…
If your company invests say £5,000 in qualifying plant it will be able to write off £6,500 (£5,000 x 130%) against its taxable profits. If your company has taxable profits more than £6,500, it will save £1,235 (£6,500 x 19%) in corporation tax. Which means:
- Your tax saving is 24.7% (£1,235/£5,000) of your investment cost, and
- The net cost of your investment is effectively £3,765 (£5,000 – £1,235).
Beware the fine print
As you would expect, there will be circumstances – grey areas – where the legislation that maps out the do’s and don’ts to claiming this relief will deny you the 130% deduction. In their notes describing the proposed changes HMRC said:
“Certain expenditures will be excluded…, there will be exclusions for used and second-hand assets and expenditures on contracts entered into prior to 3 March 2021 even if expenditures are incurred after 1 April 2021. Plant and machinery expenditure which is incurred under a Hire Purchase or similar contract must also meet additional conditions to qualify for the super-deduction…”
And there are alternatives
Even if you cannot claim this 130% Super-deduction, your expenditure may qualify for the existing 100% Annual Investment Allowance, a 50% or 100% First Year allowance or a range of writing down allowances.
Check out if you could claim
However, this is a significant incentive to invest if your company is likely to be profitable from 1 April 2021. To ensure that any significant investment you may make will qualify for the Super-deduction or to discuss other tax options, please call.
For more information or to discuss any issues raised above please contact Simon Bell by phone on 01376 571358 or email [email protected] . This article is written in general terms and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved and it is recommended that you take professional advice before acting or refraining from acting on any material in this article.
