One of the measures announced in the Budget is a new tax relief for companies who pay Corporation Tax. It’s a 130% tax relief on your company’s investment in plant and machinery.
It’s a decision which has in part been made in response to the effects of Covid-19 on companies nationwide.
Why has this huge tax relief been introduced?
HMRC’s Policy Paper define the objective as: “This measure is designed to stimulate business investment. It does so by increasing the incentive to invest in plant and machinery by offering higher rates of relief than were previously available.”
And during his Budget speech, Chancellor Rishi Sunak said: “With the lowest corporation tax in the G7, we need to do even more to encourage businesses to invest (for decades we have lagged behind our international peers). We need to unlock cash reserves so today I can announce the super-deduction. For the next two years when companies invest, they can reduce their tax bill with super deduction by 130% of the cost.
“We’ve never tried this before in our country – the Office for Budget Responsibility (OBR) says it will boost investment by £20bn a year. It is worth £25bn for the two years it is in place, this is bold, unprecedented action.”
It’s also been interpreted as a sweetener to the Corporation Tax rises that are planned for 2026. This will see the current Corporation Tax rate of 19% on all company profits, rise to 25% on profits over £250,000. Profits up to £50,000 will stay on 19% and there’s a staggered increase in rate up to the top 25%.
How does the super deduction tax relief work?
Some basic facts:
- This is only available to limited companies that pay Corporation Tax, not sole traders or business partnerships.
- It applies to purchases between 1 April 2021 and 31 March 2023
- It’s a 130% allowance on most new plant and machinery expenditure. Whatever usually qualifies for the 18% main rate writing down allowances.
- There’s also a 50% first year allowance on whatever costs are usually eligible for the 6% special rate writing down allowances.
This means that for every £1 you invest in qualifying plant and machinery, you’ll get a 25p reduction in your Corporation Tax bill.
What is ‘qualifying plant and machinery’?
This new corporation tax relief applies to new, tangible items your company buys. They don’t include second hand items or things that are for leasing to a third party.
Qualifying plant and machinery, like (but not exclusively):
- “Solar panels
- Computer equipment and servers
- Tractors, lorries, vans
- Ladders, drills, cranes
- Office chairs and desks
- Electric vehicle charge points
- Refrigeration units
- Compressors
- Foundry equipment”
Buildings, cars and other items are excluded from the super deduction. It’s up to you to check that what you’re claiming for is eligible.
Are there any issues if I sell these assets?
The policy document states: “…for assets that have been claimed under the super-deduction, the disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3…”
This is about the longer term picture when you come to sell any of these assets purchases under the super deduction and factoring in where your company sits in the new higher Corporation Tax bands.
As Richard Jones, Business Tax Manager for ICAEW, explains: ”However, if you dispose of that asset before the end of the regime, it could end up costing you more in tax than you got a deduction for. That uplift is something to look out for. Good record-keeping is essential.”
There’s no doubt about it – this is an amazing cash boost for limited companies in every industry. Particularly now the effects of the pandemic and Brexit on businesses can be more clearly seen.
If you’re a limited company, it’s definitely worth looking not, especially if you were looking to buy new plant and machinery anyway. Just keep an eye on how it might affect things in the next few years, if you decide to dispose of any of these assets.
