What is Super Deduction?
The super-deduction scheme was introduced as part of the 2021 budget. Under it, businesses can claim up to 130% of the cost incurred on qualifying equipment and machinery against taxable income. Businesses have always been able to claim back equipment or machinery investments. With this scheme, for every £1 of investment, there is a 25p tax cut.
The scheme is valid from April 2021 to the end of March 2023. The super-deduction scheme only applies to qualifying plant and machinery investments. These include all those investments that originally qualified for an 18% write-off, such as investments in high-cost IT equipment or other necessary work machinery.
In addition, there is a special 50% allowance for the first year of investments on long-life assets till March 2023. The scheme was introduced to counter the drop in investments following the COVID-19 pandemic. This is intended to encourage investment and promote economic growth.
How will it benefit my business?
The super-deduction scheme has major business benefits. Due to this scheme, businesses that feel hardest hit by taxes and suffer from lower investments have much to gain. Because of the nature of the scheme, this is the best time to consider investing in IT equipment. As a qualifying asset, it can save you a lot of money.
Additionally, this can help you better manage cash flow. Corporate and other taxes generally reduce cash flow, an added worry for struggling businesses. Under the scheme, the tax allowances help you retain more cash in the business. As a result, you can get a better handle on other business expenses without risking a negative cash flow.
Finally, increased cash flow and write-offs can help you improve your budget. You may be able to allocate more to, for example, your IT budget, as you are facing a major write-off on the investment. Business operations can be better managed, and you have greater opportunities to make worthwhile investments.
Quote from the ACCA
The ACCA specifies capital investments as “new and unused assets… that are subject to some specific exclusions.” Certain types of assets are therefore excluded from this write-off, including:
- Second-hand equipment purchased before March 2021 does not qualify for deductions.
- Any equipment or machinery acquired under a hire purchase or similar contract
- Cars, building structures, and leasing equipment are also excluded
Hire purchase equipment is subject to further conditions to qualify for the write-off.
The super-deduction scheme is a major win for businesses looking to reduce taxes. Businesses are looking to take this opportunity to increase their investment potential. The scheme increases business growth potential as the write-offs leave you better able to manage cash flows.
How much could I save?
The new tax scheme will help you save significant chunks on your investment. This is better explained with a simple example. Let’s say you have invested £100,000 worth of IT equipment. The amount you will save will be calculated by the super-deduction rate, and the corporate tax rate:
Super-deduction: £100,000 x 130%= £130,000
Corporate tax workings: £130,000 x 19%= £24,700
Compared to an Annual Investment Allowance (AIA) under the previous scheme, you would only have saved:
AIA rate: £100,000 x 100%= £100,000
Corporate tax workings: £100,000 x 19%= £19,000
Time to start saving!
As demonstrated, your saving potential is largely increased under the super-deduction scheme, but be quick as the scheme will be ending in March 2023.
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