Capital allowances: Super-deduction reminder
Back in March 2021, as part of the government’s plans to help with the economic recovery from the COVID-19 pandemic, a new first year allowance for companies was introduced, known as the ‘Super-deduction’.
This new first year allowance allows companies to claim 130% capital allowances on qualifying main rate expenditure (for example office equipment, items of machinery etc) incurred between 1 April 2021 and 31 March 2023 and 50% on special rate expenditure (for example air-conditioning, electrical systems etc). This is in addition to the existing annual investment allowance (AIA) of £1,000,000 (which has recently been made a permanent allowance), which allows a 100% capital allowance claim.
Key points to note on the Super-deduction
- Only available on purchases of new qualifying capital expenditure
- Available on qualifying expenditure incurred between 1 April 2021 and 31 March 2023
- Only available to companies subject to corporation tax, not individuals, partnerships, or LLPs
- Not available on cars
- No limit or cap on the level of expenditure qualifying for the super-deduction
What are capital allowances?
Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax deductible. Businesses deduct capital allowances when computing their taxable profits.
A company for the year ended 31 December 2022 makes an accounting profit of £50,000 which includes a charge to depreciation of £10,000 and qualifying main rate capital expenditure during the year of £25,000.
Corporation taxation computation:
|Profit before taxation||£50,000|
|Add back: Depreciation charge||£10,000|
|Deduct: Capital allowances (£25,000 x 130%)||(£32,500)|
|Profits chargeable to corporation tax (PCTCT)||£27,500|
|Corporation tax charge (£27,500 x 19%)||£5,225|
As stated above, this temporary allowance is only available for a further 6 months up to 31 March 2023.
Decisions on the most tax-efficient mix of capital allowance claims and loss claims may be complex and will also need to be assessed alongside the businesses cashflow requirements.
Such considerations may require forecasting of future business performance and capital expenditure to aide the business in making the right decisions. It is always recommended to take into account the taxation benefits/consequences when making the business decision of purchasing capital assets, including the planned timing of such expenditure.
This article is only a brief outline and reminder, should you require further information or assistance with all capital allowance claims, please do not hesitate to contact us.
Article written by Jamie Burnham