The COVID-19 pandemic has prompted an unprecedented level of government intervention in almost all areas of society and the economy.

In the UK, with multiple lockdowns, swathes of the workforce forced to isolate, and global supply chains restricted, fears for the state of the economy have been well grounded.

To counteract the potential impact of the pandemic on UK businesses, we have seen the government implement various schemes. These include the recovery loan scheme, the furlough scheme and changes to capital allowances – the focus of this article.

Capital allowances are nothing new. A proportion of the cost of various pieces of necessary “plant and machinery” can be offset against a business’ profits. This reduces the amount of Corporation Tax limited companies need to pay, or personal tax for sole traders.

At the start of April 2021, the Treasury announced the expansion of capital allowances – the super-deduction.

Why? In their own words, “making capital allowances more generous works to stimulate business investment”.

Read on to have the capital allowances super-deduction explained.

What is the capital allowances super-deduction?

Note: The super-deduction does not operate in isolation. The Annual Investment Allowance (AIA) has been in existence since 2008. This allows most businesses to claim certain plant and machinery costs in full up to a limit. 

Furthermore, the Treasury has introduced the special rate first year allowance (SR allowance). This extends the first-year allowance for certain assets to 50 percent.

The super-deduction, set to run for two years, has been of particular interest to limited companies. It is not currently applicable to sole traders.

During this two-year window, limited companies purchasing qualifying plant and machinery can claim a 130% super-deduction capital allowance. According to the Treasury, this allows businesses to reduce their tax bill by up to 25p for every pound invested.

Qualifying assets: plant and machinery

Limited companies can only use the super-deduction to offset the costs of certain qualifying plant and machinery.

While “machinery” is relatively self-explanatory (mechanical items used in the running of a business), “plant” is a broader term and is sometimes assessed on a case-by-case basis by HMRC.

Plant and machinery assets belong to different “pools” referring to the amount of relief applicable to them. As noted, not all assets will fall into the super-deduction or SR relief pools. For example, second-hand assets will not be eligible.

Our recommendation would be to speak with a qualified accountant like Accountants East London for advice on eligibility.

How to make use of the super-deduction

Following on from above, expert advice is prudent here. Limited companies will almost certainly want to take advantage of this generous scheme, but proper tax planning is vital to maximise its impact within the two-year lifespan currently in place.

As noted above, the first step is to identify whether asset purchases qualify firstly for capital allowances, and then for the more generous super-deduction or fall under the SR allowance. 

Limited companies should report these assets to HMRC when filing their annual Corporation Tax return.

Summary: capital allowances super-deduction explained

Generous and potentially highly beneficial to limited companies – but not without certain limitations to be aware of – the super-deduction is a significant change to the capital allowances scheme.

This overview should give limited company owners the headlines around the super-deduction; however, we are merely scratching the surface of the world of capital allowances and corporation tax.

Why not get in touch for a no-obligation chat with one of our expert tax accountants to find out how you could leverage capital allowances and the super-deduction to support your business?