Business owners have until 31st March to take advantage of an investment incentive scheme that offers up to 130% tax relief on qualifying plant and machinery purchases.
Dubbed the ‘super deduction’ capital allowance, the scheme was introduced in April 2021 in an attempt to stimulate capital spending by businesses in the wake of the COVID-19 pandemic.
The 130% allowance is available as first-year relief on qualifying main rate plant and machinery investments. That means that for every pound a company invests, they are able to cut their tax bill by up to 25p. Qualifying main rate assets include:
- Computer equipment and servers
- Lorries, vans and other delivery vehicles
- Ladders, drills, cranes
- Office chairs and desks
- Refrigeration units
- Manufacturing and production equipment
- Tractors and agricultural equipment
Alongside this rate, there is also currently a 50% first year allowance for purchases of special rate assets which also expires on 31st March 2023. Special rate assets include what are defined as ‘integral’ additions to a building, which these days covers things like solar panels and electric vehicle charging points.
Both the super deduction and special 50% rate are available for purchases of new equipment only.
World-beating tax relief
The super deduction rate has ranked as the most generous tax break available on capital investments in any of the 38 OECD member countries ever since it was introduced. It came about from recognition by the government that something drastic had to be done to kickstart business investment in the wake of the pandemic or else the economic fallout could drag on much longer than it needed to.
Capital spending by UK businesses fell by 11.6% from prior to the pandemic in 2019 to 2021. But this was already against a backdrop of weak business investment since the 2008 banking crisis – something the government argued had already contributed to low productivity growth.
The UK government said at the time: “…pandemic-related economic shocks and the accompanying uncertainty have chilled business investment. This super-deduction will encourage firms to invest in productivity-enhancing plant and machinery assets that will help them grow, and to make those investments now.”
The financial incentive to take advantage of the scheme while it is still available is considerable. Up until 31st March, for every £1 million spent on main rate assets, the super deduction rate means businesses can write down corporation tax liabilities by £1.3 million. At the present 19% tax rate, that’s a tax saving of £247,000 per million spent.
From April 1st when the scheme reverts to the previous dual write down allowance (WDA) and annual investment allowance (AIA) system, maximum deductions per million pounds spent on capital assets will add up to just £262,000. That works out as a tax saving of £49,780. So by making your purchases by March 31st, you can in other words save an extra £200,000 in tax per million pounds invested.