Government investment incentive, explained

Phil Archer, manager at d&t, breaks down the super deduction tax break and how it works

If you own a business, you’ll likely have heard about the government’s new super deduction tax break.

What is it and what does it cover?

Throughout the COVID-19 pandemic, the government has introduced a number of measures to support businesses.

Despite this unprecedented support package, pandemic related economic shocks and the accompanying uncertainty have meant many businesses have cooled their investments - especially when it comes to larger capital purchases such as commercial vehicles, plant and machinery.

To help with this, in March 2021 Rishi Sunak announced the super deduction tax break, aimed at helping firms make the investments that are often essential to many businesses.

The new incentive enhances the level of capital allowance and gives businesses investing in qualifying equipment a much higher tax deduction in the tax year of purchase than would otherwise normally occur.

If you purchase any qualifying asset after April 1, 2021 (until March 31, 2023), you can claim either a 130 per cent first-year relief on qualifying assets or 50 per cent first-year allowance on special rate (SR). This works by being claimed against your taxable profit and reduces your corporation tax bill.

Are you eligible?

Any limited company that pays corporation tax and purchases qualifying assets after April 1, 2021, can qualify for these enhanced tax incentives.

Sole traders, partnerships and limited liability partnerships do not qualify and therefore cannot make the most of this tax break.

What counts as a ‘qualifying purchase’?

Although not all business investments will qualify for the new allowances, the super deduction and special rate tax break accounts for a wide range, which covers many of the most common large capital investments.
For example, the super deduction covers:

• Commercial vehicles, tractors, lorries, vans, etc.
• Office chairs and desks.
• Solar panels.
• Electric vehicle charge points.
• Computer equipment and servers.
• Refrigeration units and compressors.
• Ladders, drills and cranes.
• Foundry equipment.

There’s no maximum limit on the amount of capital investment that can qualify for either the super deduction or the SR allowance.

How does it work in practice?

Let’s say, as an example, your business has profits of £40,000 and you decide to invest £50,000 in a new commercial vehicle. Corporation tax is at 19 per cent.

Current tax reduction is:
£50,000 x 19 per cent = £9,500.

New super deduction tax reduction is:
£50,000 x 130 per cent = £65,000.
£65,000 x 19 per cent = £12,350.

The corporation tax you pay will reduce by £2,850.

The government hopes this tax incentive will spur investment by UK businesses, which will, in turn, encourage economic growth.

If you’re an eligible company that would like to take advantage of this tax incentive, now could be a great time to invest.

At d&t, we also have the ability to help you fund some of the equipment and vehicles through asset finance. This could be a great option if you’re thinking of upgrading any machines or vehicles.

The author
Phil Archer is the manager at d&t, multi-award-winning team of chartered accountants and expert business advisers.