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The ‘super deduction’ and the ‘SR allowance’ are two temporary allowances that have been introduced by the government to encourage investment in businesses and offer some much-needed relief for UK companies.
As part of the government’s efforts to boost the economic recovery from the Covid-19 pandemic, the Chancellor announced two temporary first-year allowances on 3rd March 2021.
The ‘super deduction’ and the ‘SR allowance’ will encourage investment in businesses and offer some much-needed relief for UK companies.
Both allowances will offer businesses investing in qualifying equipment a higher tax deduction for the year of purchase (a first-year allowance, or ‘FYA’). These benefits apply to capital investments made between 1st April 2021 and 31st March 2023. They work alongside the Annual Investment Allowance (‘AIA’), whose limit was extended to £1m until the end of 2021.
Capital allowances allow companies to write off the costs of specific capital assets instead of accounting depreciation, which is not tax-deductible. When calculating taxable profits, companies are required to ‘add back’ depreciation before deducting capital allowances. Once taxable profits have been determined, then businesses can apply the appropriate tax rate (e.g., corporation tax at 19%).
The super-deduction offers a capital allowance rate of 130% and the SR allowance has a rate of 50% for plant and machinery purchases. Both allow companies to lower their corporation tax bills following investment.
Covid-19 has exacerbated already low levels of business investment, with a reduction of 11.6% between Q3 2019 and Q3 2020. The UK has dwindled on business investment, and we’re regularly outperformed by our peers. These temporary changes to capital allowances make our regime far more competitive, taking the net present value of our plant and machinery allowances from 30th in the OECD to 1st place.
These super-deductions offer companies a strong incentive to make investments, or bring investments forward, driving productivity in UK businesses and promoting economic growth.
Plant and machinery expenditure which normally qualifies for the 18% main pool when written down as a Writing Down Allowance (WDAs) can now qualify for the super deduction at 130%.
The same expenditure which would normally qualify for the 6% special rate pool (like integral building features and long-life assets) can now be claimed under the SR allowance at 50% instead.
Essentially, companies can have their taxes cut by up to 25p for every pound invested in plant and machinery.
Super-deductions can be used in conjunction with other capital allowances, like AIAs, or Research & Development Capital Allowances (RDAs), allowing you to maximise your tax relief.
The super deduction and SR allowance are only available to companies subject to corporation tax, who have qualifying expenditures. Individuals, partnerships and LLPs will not be eligible. Furthermore, only contracts entered into after 3rd March 2021 and expenditure incurred after 1st April 2021 will qualify.
Most tangible capital assets are considered plant and machinery when claiming capital allowances. The new rules have not widened the field of eligible expenditure but offered a new incentive to claim on the same group of items. Long-life items and other specific purchases (like cars with CO2 emissions over a certain threshold) will fall under special rate assets, therefore the SR allowance is applicable to them, as are:
There are some notable exceptions to the new super-deductions; assets that fall into the main rate pool or the special rate pool but are used for leasing will not qualify. Items bought second-hand will also not be eligible, although they will qualify for the AIA.
The previous regulations of capital allowances apply to the new super-deductions. If the full deduction cannot be set against accounting profits, then a loss will be created which can be carried forward. However, new temporary rules will also allow companies to carry losses back under the three-year loss carryback rule.
At Myriad Associates, we are experts in R&D tax relief. If you’d like to know how we can help your company maximise funding for innovative projects, give us a call on 0207 118 6045, or get in touch with our contact page.
Please contact us to discuss how working with Myriad can maximise and secure R&D funding opportunities for your business.
Contact usFood and drink R&D (eligible under the R&D tax credit scheme) covers any project that aims to push the boundaries of knowledge and technology within the industry.
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