The super deduction was one of the flagship announcements in Rishi Sunak's March Budget.
Designed to stimulate business investment and encourage businesses to spend, the super deduction will allow companies to claim a whopping 130% deduction on taxable profits for investments in plant and machinery between 1 April 2021 and 31 March 2023. What's more, there is no spend cap.
Therefore, if you spend £10,000 on qualifying items within the two year window, you will be able to deduct £13,000 from taxable profits and reduce your corporation tax bill accordingly.
A high-level definition of qualifying items is assets that are acquired "with which to carry on trade". IT equipment, office furniture, machinery and commercial vehicles should all qualify, as should investments to make your business more green - installing electric vehicle charging points, for example. Cars, however, do not.
The reality is that most small businesses will not be sitting on a big cash pile to allow them to make these sorts of investments. More than one in five will turn to finance.
If that's you, your choice of finance product will have a bearing on your ability to claim the super deduction and will need to be factored into your total cost of ownership calculation.
For tax purposes, if your business acquires an asset with a loan, title to the asset will transfer to you immediately on the purchase and you will be able to claim the super deduction.
HP, with an option fee at the end of the contract to obtain legal title of the asset, is an addition for capital allowances and should also be entitled to the super deduction.
Finance leased assets, however, which may have a peppercorn rent in perpetuity after the agreement, are not assets where the lessee is entitled to capital allowances and, barring any change in the way the draft legislation has been worded, will not qualify for the super deduction. That doesn't necessarily make leasing immediately the wrong choice, because the way rentals and depreciation are treated in the P&L account could have an equal or greater benefit depending on your profit levels. This is certainly something to discuss with your accountant.
The environment is undoubtedly designed to make business investment attractive: the government has never before offered allowances in excess of the amount being spent. That said, you should always consider the broader context and not spend money for the tax breaks alone. Decisions to invest should be based on making your business more profitable and productive.
You should think too about your working capital requirements. Leaving enough cash in the business to cover growth and unforeseen expenses is extremely important, so a combination of some borrowed money and cash could well be the right solution, even if you have all the cash available now.
Talk to us for more information.
Our thanks to Simmons Gainsford, Chartered Accountants for confirming the tax treatments mentioned in this article.