The capital allowances super deduction and special rate (SR) policies enable business owners to claim up to 130% tax relief on eligible plant and machinery costs. With these tax incentives ending in March 2023, our capital allowances consultant Thomas Webb shares key information on how the reliefs work and how you can claim.

The super deduction and special rate (SR) allowance were announced by the UK Government during the Spring Budget 2021. Following the negative impact of the COVID-19 pandemic on business investment levels, the new capital allowances measures aimed to support economic recovery by incentivising companies to invest in productivity-enhancing plant and machinery assets.

The temporary tax incentives came into effect on 1st April 2021 and will come to an end next year on 31st March 2023, leaving a small window to maximise the availability of the reliefs. An important factor is that contracts must be entered into from 3rd March 2021, with spend being incurred from 1st April 2021. Maintaining good records is important and can assist in ensuring your capital allowances claims are accurate.

If you are not familiar with capital allowances and how they can benefit your business, find out more in our ‘What are capital allowances and how can they help your business?‘ article.

Who can claim the super deduction and SR allowance?

Any company that is subject to corporation tax can claim the super deduction. Sole traders, individuals and partnerships are not eligible to claim because they do not pay corporation tax.

How does super deduction work?

The capital allowances super deduction offers a 130% first-year tax relief on corporation tax for new and unused assets that would traditionally be pooled within the main rate pool. In contrast, the standard main rate pool is written down at 18% per annum.

For example, if your company spends £100,000 on eligible main rate plant and machinery investments, you will be entitled to claim £130,000 (130% of £100,000), resulting in a real time tax saving of £24,700 in the year that the expenditure has been incurred, as opposed to £19,000 with 19% being the corporate tax rate. If the same expenditure was pooled in the main rate pool, you would receive £3,420 (£100,000 x 18% x 19%).

An important distinction is that the super deduction is uncapped, whereas the annual investment allowance is capped at £1 million.

Which assets qualify for super deduction?

The 130% capital allowances super deduction rate can only be claimed for plant and machinery additions. Some assets that qualify for super deduction include:

  • Office equipment (e.g. desks and chairs)
  • Machinery such as door furniture, lathes and planers
  • Certain vehicles including vans, lorries and tractors
  • Construction equipment such as bulldozers, excavators and compactors
  • Warehousing equipment such as forklift trucks, stackers and pallet trucks
  • Fire alarm systems
  • Kitchen and bathroom fittings – sanitaryware

The list above is not exhaustive. For more detailed information on qualifying assets, contact us to speak to one of our capital allowances specialists for a tailored assessment.

What is special rate allowance?

Traditionally the special rate pool is written down at 6% per annum. Like the super deduction, the SR allowance is uncapped.

What qualifies for special rate pool?

SR allowance can be claimed on the following special rate assets:

  • The ‘integral features’ of a building, such as lifts, air-conditioning and electrical systems
  • Solar panels
  • Thermal insulation purchased for existing buildings
  • Long life items (classified as assets with a useful life of at least 25 years)

The importance of timing your claim

From 1st April 2023, the super deduction and SR allowance are being withdrawn, in line with the corporation tax increase from 19% to 25%. The current relief provided by the super deduction is almost equal in value (130% x 19% = 24.7%), however it presents a timing benefit and cash flow advantage. This is because the value is recognised in the year that the expenditure has been incurred, as opposed to being written off over a number of years, which frees up cash for your future investments.

Another key factor is that chargeable periods that fall between 1st April 2023 and 31st March 2024 will be subject to a lower relevant percentage. A 31st December 2023 year end will have a relevant percentage of 107.4%. In conjunction with AIA being 100% relief, claiming super deduction could be the more suitable option – a capital allowances specialist will be able to advise you what is best for your business.

It should be noted that the current Annual Investment Allowance (AIA) enables companies to claim 100% relief on most plant and machinery expenditure costs up to a value of £1 million. As a result, after the corporation tax increase, businesses will be able to claim relief on the full 25% tax rate for eligible expenditure via the AIA.

How to claim super deduction and SR allowance

You can check if your business is eligible to claim super deduction and special rate first year capital allowances on the Government website.

The only way to ensure that you claim the full relief you are entitled to is by working with a capital allowances expert. At PKF Smith Cooper, we provide specialist capital allowances support in Nottingham, Derby and across the Midlands. For an evaluation of your company’s assets or to discuss future investment plans, contact us today to arrange a consultation call with one of our capital allowances team.