What is the New 130% Super-Deduction Scheme and How Does it Work?

Super Deduction Scheme

What is the New 130% Super-Deduction Scheme and How Does it Work?

Since Covid-19 has adversely affected the UK’s economy with a drastic fall in business investment and growth. To counter these effects, the UK government has launched the new 130% Super Deduction Scheme to stimulate and promote business investment and growth for the economic revival. This scheme provides tax reliefs as a supplement to the capital allowance, encouraging businesses for additional investment.

From 1st April 2021 to 31st March 2023, this scheme will aid businesses to claim a 130% capital allowance on investments in qualified plant and machinery. Under this scheme, a business can save up to 25% on every pound it invests in the qualifying equipment.

Read on to know more about this amazing scheme.

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New Capital Allowances:

 

In the latest budget of 2021, Rishi Sunak, Chancellor of the Exchequer, declared a series of new capital allowances to reduce the corporation tax bills. This measure was aimed at boosting the UK’s economy by raising business investment and improving the economic conditions of the UK in the wake of COVID-19.

This initiative is intended to level up and balance the economic prosperity in both the southern and northern regions of the UK.

 

super deduction scheme

 

Within this scheme, businesses can now benefit from the four new capital allowances incentives:

  • Super Deduction: For the first year, it offers 130% first-year relief as the main rate incurred on plant and machinery (those qualified for  18% write-down allowance) until the end of March 2023.
  • 50% First Year Allowance (FYA): Companies can claim back 50% FYA on the investments (assets that qualify for 6% write-down allowance) in special rate assets until March 2023 for companies
  • Annual Investment Allowance (AIA): This allowance provides 100% relief on the investment in plant and machinery with a maximum threshold of £1 million until 31st December 2021.
  • Enhanced Capital Allowances (ECA+): Companies with Freeport tax sites can claim 100% on plant and machinery investment until September 2026.
  • Structure and Building Allowance (SBA+): Companies, partnerships and individuals that are under Freeport tax sites can claim a 10% capital allowance on buildings and structure until September 2026. This allowance is better than the 3% available.

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How Does Super Deduction Scheme Work?

 

This scheme reduces the cost of some capital assets against taxable income. It allows businesses to get a cost reduction on the qualified plant and machinery from their taxable profit. The Super Deduction Scheme offers companies to reduce 130% of the cost on qualified plans and machinery against their taxable profit.

If a company has £1 million of qualifying machinery and plant expenditure, this scheme will work as follow:

  • If a company invests £1 million on qualifying assets, it means it can claim £1.3 million (130% of the cost of initial investment) from its taxable profit.
  • As the current rate of corporation tax is 19%, the company’s corporation tax bill will be reduced by 19% of the deducted £1.3 million, which is £247 000.

Equipment that Qualifies for Super Deduction:

 

Those assets qualify for the Super Deduction Tax Relief or 50% FYA capital allowance:

  • Electric vehicle charge points
  • Ladders, drills, and cranes
  • Computer equipment and servers
  • Solar panels
  • Compressors
  • Tractors, lorries, and vans
  • Office chairs and desks
  • Refrigeration units
  • Foundry equipment

This is just a general list of equipment. Other equipment may also qualify for this scheme.

Quick Sum Up:

 

You are eligible to apply for the Super Deduction Scheme if you have to spend money on any qualifying asset listed above between April 1, 2021, and March 31, 2023. You should remember that if you buy a qualifying asset under a hire purchase or a similar contract, you need to meet additional conditions to qualify.

For more further on this scheme go through the UK’s government website.

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Disclaimer: This blog provides general information on Super Deduction Scheme.

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