As part of the Chancellor’s Budget 2021 announcement, a new “super-deduction” capital allowance scheme was announced. This means that companies will be able to claim 130% capital allowances on qualifying plant and machinery investments purchased between 1 April 2021 and 31 March 2023.
The purpose of this super-deduction scheme is to encourage investment into the UK after lockdowns decimated the economy.
This scheme is available to all businesses — big or small.
What are capital allowances?
Capital Allowances are an incentive specific to the UK where companies can write off certain capital investments against their final tax bill.
Basic Accounting Principles require that a company write off a capital expenditure such as a new computer, motor vehicle, property, etc., over a certain number of years. This is called Capital Depreciation.
According to Basic Accounting Rules, you can’t buy, say, a new mahogany desk for your office at £50,000 (I want one!) and chop it off of your profits in one fell swoop.
There are two ways to calculate depreciation, but for this example, let’s use the simpler “straight-line depreciation” which divides the total cost of the asset by the number of years the asset will be of use in your business.
Now, we all know mahogany desks can last a lifetime, but let’s say this particular one will only be useful to your business for 10 years.
So, to calculate its annual depreciation, you divide £50,000 by 10 and get £5,000.
Therefore, for the next ten years, you will be allowed to deduct £5,000 from your profits until the value of the mahogany desk has been paid off.
Under the Annual Investment Allowance (AIA) scheme, a company is allowed to claim 100% of that asset’s cost against its tax bill, up to a maximum of £1 million. That means that, even though your books say you can only chop £5,000 off of your profits, under the AIA system, you are allowed to take off the full £50,000 against your tax bill.
Hello, new mahogany desk!
How to calculate the super deduction
Using the new super-deduction scheme, you will not only be able to write off £50,000 for your new mahogany desk, you will actually be able to write off 130% of the value of the purchase.
Let’s see how that translates in terms of your final tax bill:
Let’s imagine a company with £100,000 profit on its books and £10,000 depreciation deduction for that year. Under the Capital Allowance scheme, they would need to “add back” the depreciation:
So, £100,000 + £10,000 = £110,000.
Then they would need to deduct the mahogany desk for tax purposes:
£110,000 – £50,000 = £60,000.
Corporate Tax of 19% on £60,000 = £11,400.
Under the super-deduction scheme, however, they would be able to claim 130% of the mahogany desk, or £65,000.
So, £110,000 – £65,000 = £45,000.
Corporate Tax of 19% on £45,000 = £8,550.
That’s a total tax saving of £2,850!
Of course, the savings will be more prominent for bigger businesses.
What is considered “Plant and Machinery”?
Because the definition of “Plant and Machinery” purchases is enshrined in Case Law, its interpretation is something that can be contested in the courts.
This has led some to believe that the scheme might lead to increased levels of fraud.
But, for those of us not interested in splitting hairs, HMRC says that “Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances.”
These can include:
- Computers, tablets, laptops
- Business mobile phones
- Various tradesman’s machinery, such as drills, electric screwdrivers, power saws, etc.
- Carpenters’ tools
- Office chairs and desks (Hello, mahogany desk!)
- Electric vehicle charge points
- Office furniture
- Office bookshelves
- Office TVs
- Digital display panels
- Air conditioning units
- And so forth
For a full breakdown of all the calculations, allowances and types of assets that can be deducted as part of the super-deduction scheme, as well as information on other capital allowance incentives, please see this PDF document.
And, of course, we are always available to answer our clients’ questions. If you need more info, please contact us here.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.