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Business Services  •  Business Tax  •  capital allowances  •  Tax Planning

Super deduction for companies or super delusion?

By RJP LLP on 27 May 2021

Rishi Sunak’s super deduction policy, whereby companies  can claim 130% tax relief on investment made in plant and machinery between 1 April 2021 and 31 March 2023, was unveiled with huge fanfare. It was billed as a way to  boost spending, future-proof business and kick-start the economy.

Potentially all these claims are true, and the relief has certainly created a lot of interest. It has also provided a distraction from another big Budget announcement; the forthcoming increase to the corporation tax rate from 19% to 25% with effect from 1 April 2023; the day after the super deduction ceases to be available, and which will affect all companies with profits in excess of £50,000.

How the super deduction works in practice

When you delve a bit deeper, all is not as it seems however and here is an example of why:

Acme Ltd manufactures widgets for the automotive industry. Management wants to buy a new 3D printer to increase production, and this will cost £200,000. After hearing about the super deduction, management decide to go ahead with the purchase. They have calculated that they will be able to make a profit of £200,000 from their investment.

By claiming capital allowances, the company is able to write off the cost of the machine against corporation tax, so the £200,000 investment would usually cost them £162,000

(£200,000 less corporation tax relief of 19%).

Due to the super deduction, Acme can in fact write off 130% of their investment cost, which brings the net cost down to £150,600  (200,000 less relief of (£200,000 x 130% x 19%)).

The saving in the cost of the investment  is £11,400.

How does the super deduction offset the corporation tax increase?

However, when you consider this incentive alongside the planned increase in the rate of corporation tax from 19% to 25%, it is a saving that is going to be clawed back.

Returning to the Acme Ltd example, if the company makes profits of £200,000 from the new printer and pays corporation tax at the rate of 19%, the net profit is £162,000. But because the corporation tax payable on these profits will be 25%, the net profit will be £150,000 – an increase in tax of £12,000 set against a reduced cost for the equipment of £11,400.

In fact, if Acme Ltd bought the machine after the super deduction has ceased to be available, and when the corporation tax rate has increased, the relief available at 25% will be higher at £50,000 and the net cost of the machine will be £150,000.

In summary, despite the hype, there is no incentive to rush to make investments when you consider the small print.

The effect of the ‘giveaway’ billed by the Chancellor is actually not a giveaway, but rather an immediate way of mitigating a future increase in corporation tax rates for those companies that choose to invest whilst the increased relief is available.

If you would like advice on capital allowances and planning for the corporation tax increase, please email partners@rjp.co.uk.

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