As the UK economy gets back to full speed and confidence grows amongst small businesses, the impact of the ‘super-deduction’ and the ‘special rate allowance (SRA)’ should encourage even stronger growth.
The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive.
Both allowances offer businesses investing in qualifying equipment a higher tax deduction for the year of purchase (a first-year allowance, or FYA).
These benefits apply to capital investments made between 1 April 2021 and 31 March 2023. They work alongside the Annual Investment Allowance (AIA), whose limit was extended to £1 million until the end of 2021.
Capital allowances allow companies to write off the costs of specific capital assets instead of accounting for depreciation, which is not tax-deductible.
When calculating taxable profits, companies are required to ‘add back’ depreciation before deducting capital allowances. Once taxable profits have been determined, then businesses can apply the appropriate tax rate.
The super-deduction offers a capital allowance rate of 130 per cent and the SRA has a rate of 50 per cent for plant and machinery purchases. Both allow companies to lower their Corporation Tax bills following eligible investments.
Plant and machinery expenditure which normally qualifies for the 18 per cent main pool when written down as a Writing Down Allowance (WDA) can now qualify for the super-deduction at 130 per cent.
The same expenditure which would normally qualify for the six per cent special rate pool (like integral building features and long-life assets) can now be claimed under the SRA at 50 per cent instead.
The super-deduction and SRA are only available to incorporated companies, who have qualifying expenditures. Sole traders, partnerships and LLPs will not be eligible. Furthermore, only contracts entered into after 3 March 2021 and expenditure incurred after 1 April 2021 will qualify.