How Super Deduction Can Boost Your Business?

The Super Deduction is a new taxation policy introduced by the Chancellor of the UK during budget 2021 and is implemented from April 1, 2021, until March 31, 2023. According to this policy, the government will provide a 130% capital allowance for investing in plants and Machinery for new and unused products. This benefit is only applicable to the corporation tax.

The Super Deduction will eventually provide a boost in investments and encourage people to put their money into the investment. The main goal behind the Super Deduction policy is to offer incentives to businesses to recover from the COVID crisis and generate opportunities for the people of the UK. 

• Brief Guide to Capital Allowances

When And Why Did The UK Government Announce A Super Deduction Policy?

In the last two years, Britain’s economy has been heavily suffering due to COVID-19 since 2019 after imposing a lockdown across the whole country. The high number of infection rates and consistently implementing lockdowns delayed economic recovery from COVID. This situation escalated pressure on the Chancellor, Rishi Sunak, to make a new financial policy that could recover businesses and give financial support to investors and businesses.

David Malpass, the president of the World Bank, also warned the UK government to build some policies on an urgent basis to avoid further financial damages or else everything will be wiped out.  Considering this situation, a bold initiative has been taken by the Chancellor by announcing the Super Deduction policy for two years, starting from April 1, 2021, to March 31, 2023.

New Capital Allowance Policy:

Before talking about Super Deduction, it is essential to understand Capital Allowance. The UK has a policy of deducting a certain amount as a capital allowance. In easier words, it is an expenditure of businesses that may claim a taxable profit.

Claiming full or partial value is entirely dependent on the assets. Once you calculate your business capital expenditure, you must mention this information on your tax return and submit it to HM Revenue and Customs (HMRC). Keeping in view, the Capital Allowances policy was revised this year and introduced these significant capital allowances.

• The first and foremost policy of new capital allowance is Super Deduction, which gives 130% relief that qualifies for the 18% main rate pool of capital allowance.
• Another exciting policy for investors is the 50% first-year allowance, which covers a special rate pool that qualifies for the 6% special rate, including essential life-long assets.
• Annual Investment Allowance also provides 100% relief that claims on the expenditure for plant and machinery. The permanent limit was set at £200,000. However, in 2021, the government has temporarily increased the AIA limit from £200,000 to £1,000,000 for the main rate pool. This will apply from January 1 to December 31, 2021. 

• Guide to HMRC Self-Assessment Forms

Understanding Of Pool And Rates:

A pool is a group where you put all of the allowances you write down into grouped assets. By doing this, you will be able to keep a record of every item easily. 

There are three types of the pool which are:

Main Rate Pool:

In the main rate pool, you put the value of all plants and machinery into the main rate pool with a rate of 18% to claim the capital allowances. Usually, businesses don’t often buy plants and machinery; therefore, this type of business can be declared as capital allowances unless they are already grouped in the special rate pool and a single asset pool.

Special Rate Pool:

In a special rate pool, you can claim a 6% rate on specific items, which are:

1. Parts of the building are also known as integral features.
2. Long-life items
3. Thermal insulation of building
4. CO2 emissions of cars over a certain threshold. 

The interesting point is that you are allowed to claim AIA on all these products except cars.

Single Asset Pools:

Apart from these two mentioned pools, you can also make a separate pool only for single assets, which are:

1. Those assets have a short life, and you won’t save them for a longer period. You cannot include cars, items you use apart from the business and special rate items.
2. Using the product outside your business as a sole trader or partner of a business.

How Super Deduction Works With The Annual Investment Allowance:

If you don’t know about AIA, it is tax relief for businesses. Through AIA, businesses can claim back 100% of the cost of the qualifying main rate pool. The UK government has temporarily raised to £1m from £200k in order to keep businesses floating. However, The Super Deduction and Annual Investment Allowance cannot be received in the same amount. 

Eligibility Criteria Of Claiming Super Deduction:

New and unused assets that qualify as the main pool rate will be eligible for Super Deduction. Apart from this, during the original announcement, the UK government excluded the property landlord because it would be leased to leaseholders and leasing any property was excluded from Super Deduction. Still, the government announced later amendments on May 18 in which ‘background plant and machinery for building now can be claimed under Super Deduction.

Which Assets Don’t Include Super Deduction:

Assets that are included in Super Deduction are:

• Unincorporated and Partnerships.
• No Super Deduction will be given to used or second-hand assets.
• Ring fence trade is completely excluded from the Super Deduction.
• The Super Deduction is not available for cars, buildings, and structures (apart from integral features)
• Landlords, including those companies that own property and lease it to other members of the same group, will not be allowed to benefit from Super Deduction.  

How Much Relief Can You Receive From Super Deduction?

In a nutshell, The Super Deduction will provide you 130% of the qualifying assets or cost compared to the usual 18% writing-down allowance for investment in the main pool rate. In the same way, SR allowance provides 50% of the qualifying cost in the first year along with the balance that will be moving into the normal special rate pool to be written down at the usual 6% rate.

Is There Any Limit To Investing A Certain Amount In Claiming Super Deduction?

The UK government has made no amount limit to claim Super Deduction or the Special Rate allowance. This means that you can claim any amount of money to get Super Deduction or SR allowance between April 1, 2021, and March 31, 2023.

The Consequence Of Selling A Claimed Asset:

There are certainly consequences for the disposal of claimed assets. When you dispose of a claimed main rate pool Super Deduction asset, you will be charged a balancing sheet which means that you will pay taxes on the sales proceeds. Similarly, when you dispose of a particular rate pool asset, you will receive a balancing charge of 50% of the proceeds and the rest of 50% will be taken away from the special rate pool. It is also imperative to check the timings of disposal. If you dispose of it after April 1, 2023, 2a 5% corporation tax will be applied to the balancing charge. If you sell the claimed Super Deduction asset before April 2023, the disposal value will be 1.3 times the actual disposal value.

Treatment In Case Of Exceptional Cases:

Hire Purchase:

If the main rate pool possession transfers to the acquirer, you may get your assets Super Deduction and SR allowance. But it is worth noting that it can only be received if all the payments are made under the HP agreement roof.

Finance Lease:

There are some complications with the financial lease. Assets bought under the financial lease are typically not allowed for Super Deduction and 50% First-year allowance.

Intangible Assets:

Intangible assets can obtain Super Deduction by incurring capital expenditures on intangible fixed assets such as software. The finance bill 2021 can equally be applied to software because it is considered capital rather than a revenue cost. 

Affect On R&D Claim:

Usually, R&D only comes under the expenditure deemed revenue for the tax. However, the Super Deduction is only applicable to expenditures related to capital. When intangible assets related to software projects gain capitalized revenue along with the costs that are capital for tax purposes, a possibility develops whether you want to claim a Super Deduction or not. R&D is entirely dependent on merit that is made, whether expenditure is capital or revenue, and you proceed accordingly. 

• R&d Tax Claim Calculator

Conclusion:

Generally, the policy introduced by the UK chancellor regarding the new Capital allowance “Super Deduction” is impressive as it provides various businesses with a chance to recover from the damages of COVID-19 and invest in the market.  However, this policy demands a proper understanding before taking any step. So, if you need any help or further insight, you should consult professionals.

Additional Resources

• Claiming tax relief on employment expenses