As you may have noticed in our recent budget summary, one of the announcements was the new capital allowance “super deduction”.
In summary, this super deduction will allow companies with expenditure from the 1st April 2021 until the end of March 2023 to claim 130% capital allowances on qualifying plant and machinery investments.
For example, let’s say Company A planned to invest £100,000 in a new piece of manufacturing equipment. If they purchased this before 31st March 2021, the deduction wouldn’t include the super deduction, but after that date, it would.
The tax saving based on a company paying corporation tax would be as follows:
- Before 31st March 2021 – £100,000 @ 19% = £19,000
- After 31st March 2021 – £100,000 x 130% = £130,000 @ 19% = £24,700
The savings of waiting a month come to £5,700, which is significant, although the above example is a large amount.
So, it appears the answer would simply be to invest after the 31st March 2021. But, is it that simple?
Important caveat to the ‘super deduction’
One caveat to the above example is cash flow. Let’s say Company A has its year end on the 31st March 2021. Assuming this is a small company, it pays its corporation tax 9 months and 1 day after the year end.
Following on from the initial example of investing £100,000 in a new piece of manufacturing equipment, let’s say the company made taxable profits – before capital allowances – of £150,000.
If the company purchases the piece of equipment for £100,000 before the 31st March 2021, the capital allowances claim will be made, reducing the taxable profits down to £50,000. This will be charged to tax at 19%, resulting in corporation tax due of £9,500, payable by the 1st January 2022.
But, what if they defer the investment until after the 31st March 2021? Well, they will gain from the capital allowances super deduction, but it will not be written off against the taxable profits in the 2021 accounts. This will result in the full £150,000 being chargeable to tax, so £28,500 will be payable on the 1st January 2022 – an extra £19,000!
For some companies, the cash flow advantage of gaining the write-off earlier will outweigh the super deduction, so this needs to be considered before a final decision is made on capital allowances.
I would always suggest that all companies have a cash flow forecast in place for the next 12 months, detailing any investment. Make sure you take this into account before making any decision around this and if you need any help please get in touch, as we offer the service of preparing cash flows for clients.
Is it possible to gain the super deduction sooner?
One question I have been asked by clients with a year end of the 31st March 2021 is: Can we do anything to gain the super deduction sooner if we do invest? It is possible to look at extending the company year end by up to 6 months. However, before doing this, there are other considerations that need to be taken into account. If you are thinking about doing this please get in touch and we can run through your specific circumstances.
Who is the super deduction available to?
My final point on this is that from the information released by the government, it would appear the super deduction only relates to companies. So, if you trade as either a sole trader or partnership. this deduction won’t be available to you.
The above is only a summary of the new super deduction to capital allowances; please get in touch if you would like to discuss your specific circumstances.
Tel: 01392 360008