If you’re in business, you’ll be used to the idea that generally you get to save tax on the whole cost of new equipment (except cars) in the year you buy it – the “Annual Investment Allowance”, which gives you a 100% deduction from profits for the cost of a laptop, van, loom or whatever. As of 1st April, companies will be able to claim a 130% deduction instead (aka the super-deduction).
If you think about it, the government had to do it, because they've announced that the corporation tax rate will rise from 19% to 25% in April 2023. Knowing that, companies would have delayed big investments in equipment until then, trying not to buy anything significant for a couple of years. That’s not conducive to economic recovery. How do you eliminate that factor from the decision-making process? You give a 130% deduction for the next couple of years. 19% x 130% comes to 24.75%, meaning that a company that’s going to be paying tax on its profits at the new 25% rate will save more or less the same amount of corporation tax if they make the purchase between 1 April 2021 and 31 March 2023 as they will if they wait until April 2023. The super-deduction just removes any tax incentive to delay investments.
As you’d expect, though, there are some wrinkles and things to be aware of! Here are a few.
- The super-deduction only applies to companies, not to sole traders, partnerships or LLPs. That’s completely reasonable – that known approaching increase in the tax rate doesn’t apply to them, it only applies to limited companies. Other businesses continue to save tax at the marginal rate of the sole trader or partner – most likely 29% or 42%. There’s no reason for them to delay purchases, so no special incentive is needed.
- Not all companies will pay tax at a pure rate of 25% from 2023. In fact, most won't - it's only companies with profits over £250,000 that will pay at that rate. Companies with profits under £50,000 will still pay at 19%, so for them the super-deduction actually is a genuine boost for a couple of years. Companies with profits between £50,000 and £250,000 will pay tax at 19% on the first £50,000 and then 26.5% on the next £200,000, so they'd still technically benefit by waiting to invest, but not by much; saving at 26.5% rather than 24.75% isn't going to make much of a difference unless the investment involved is pretty big.
- The super-deduction doesn’t apply to cars. This one is a bit more surprising. The government is using the tax system to strongly incentivise companies to provide electric vehicles to employees. There’s now a competing disincentive to delay purchase and provision of them until 2023. Perhaps the government thinks that the incentives are so big that they outweigh that disincentive, or that people need to drive around and can’t just sit at home until 2023 so cars are going to be bought anyway.
- It also doesn’t apply to some other, more niche, classes of assets, like integral features in buildings, so any company looking at big levels of investment in anything other than mainstream plant and machinery should be careful (or at least be open to the possibility that it won’t all get the super-deduction).
- It doesn’t apply if you’re going to be leasing the asset out to customers (although, for companies letting out commercial property, a subsequent change of heart by HMRC means that the super-deduction is now available on certain qualifying assets of those businesses, after they were excluded in the first draft of the legislation).
- Although you save tax on 130% of the cost on the way in, if you sell the thing again before the tax rate goes up, you have to pay tax at 130% of the proceeds on the way out too. So you can’t claim 130% tax relief on something you buy and then sell it on in short order to try and craftily create a tax windfall.
- You can’t claim the super-deduction on second-hand goods – there could be quite a lot of second-hand equipment around at the moment as businesses have failed or shrunk, but those things will only save tax at the normal rate.
So, great headlines, but when you scratch the surface things aren’t quite as generous or simple as they seem! It’s really an incentive to behave in exactly the same way as you would have done if you didn’t know corporation tax is due to rise in 2023.
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