Capital allowances super deduction

In the Budget in March 2021, a new capital allowance was introduced known as Capital allowances super deduction. 

What are capital allowances and how do they work?
A capital allowance is an expenditure that your business can claim against its taxable profit. The expenditure incurred that would qualify are most assets purchased for use within your business. 

What is Capital Allowances Super Deduction?
Capital allowances are a deduction made against your profits based on certain assets purchased. Capital allowances have existed for a long time. Super deductions are for assets purchased since 1st April 2021 and are a 130% deduction on the cost of the asset purchased. 

Who can claim the allowance?
Capital allowances can be claimed by all businesses. 
Capital allowance super deduction can only be claimed by limited companies. They cannot be claimed by sole traders or partnerships. 

Why was the super deduction introduced?
From April 2023, companies will pay corporation tax at 25%. The current rate is 19%. The super deduction rate was introduced as a tax break to spur business investment over the next two years before the increase of corporation tax rate. 

What investments would qualify?
Assets that would normally be classed as plant and machinery can claim the super deduction. Examples of the assets that would qualify include vans, computers, machinery. Cars including electric cars do not qualify for this additional deduction. 

Is there a maximum amount that can be invested to claim super deduction?
Even though AIA (annual investment allowance) has a cap on the amount that can be invested, there is no cap on the amount that can be invested in order to claim the super deduction. 

Can the super deduction cause a loss?
It is possible for the capital allowance super deduction to cause the company to incur a taxable loss. 
If this does occur, the loss can be carried forward and set off against future profits or it can be carried back. 
With the rate of corporation tax going up from April 2023 to 25%, it may be more beneficial to carry forward the loss to future years. Naturally, if the company is in need of the cash, it would be better to carry back the loss and get a refund for the corporation tax paid. 
Other capital allowances for a sole trader
Even though a sole trader cannot benefit from the super deduction of 130%, they are able to benefit from the AIA or FYA of 100%. 

What is the AIA?
Annual investment allowance is the allowance able to be claimed by sole traders and partnerships. This is at the rate of 100% of plant and machinery purchased. There is a cap on the amount of AIA available to be claimed in a year. The current cap is £1.000.000 until 31.12.2021. After that date, the cap is reduced to £200,000.

What is First Year Allowance (FYA)?
FYA gives relief at 100% of the price of specialist ‘green’ technology that is deemed to be energy efficient. There is no cap on your FYA claim.  This would include cars with low CO2 emissions, energy-saving equipment, water-saving equipment, new zero-emission goods vehicles. Electric cars are the most popular of these among businesses. 

If you are thinking of investing in your business, it may be beneficial to get the timing right in order to ensure that you are able to maximise from a reduction to your tax liability. 

Please always seek professional advice. before taking any action. We are happy to answer questions in future issues. Please send your questions through the contact us page on our website: 

Chantal Baker, is the director and founder of Champ Consultants Ltd, an accountancy and tax consultancy practice in Caterham. Please do follow us on the various social media channels. 


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