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Calling “last orders” for the Super Deduction

18th April 2022

Alice Salter examines how the Super Deduction tax incentive can help the Food & Drink sector.

As food and drink businesses emerge from the pandemic, many are looking to invest and return stronger.

Where that investment takes the form of plant, machinery, fixtures and fittings, the super deduction is a welcome incentive to help provide valuable subsidy to businesses in the sector.

So what is the super deduction?

In broad terms it is a first year capital allowance, providing tax relief at an effective rate of 25% by cutting a company’s tax bill by 25p for every £1 invested in qualifying assets. 

The main purpose of the super deduction is to encourage companies to continue to invest in plant and machinery throughout and after the COVID pandemic.

Its secondary aim was to discourage companies from waiting until the corporation tax rate rise to 25% in April 2023 in order to obtain relief from tax at the increased rate.

However, for many smaller businesses (with taxable profits <£50k), the increase to the 25% corporation tax rate may not apply to them, so the super deduction represents a real opportunity to reduce their tax bill by bringing forward investment plans to bank the super deduction, and time is running out!

The super deduction means that any expenditure on new plant and machinery, incurred between 1 April 2021 and 31 March 2023, will attract relief at 130%.  

Before the super deduction was introduced, any capital expenditure on new plant and machinery would be written down for corporation tax purposes at 100% in the year of purchase if the Annual Investment Allowance (AIA) was available, or otherwise written down at a rate of 18%.  

Critically there are also no upper limits for the super deduction, unlike AIA which is capped at £1m per year, so this could be really valuable for bigger capital investment projects.

We don’t yet know what relief might be available from April 2023, and it might be that this reverts to the AIA, with 100% relief for capital expenditure capped at £1m.

Integral  features

Alongside the super deduction there is also an increased tax relief for new special rate items (such as integral features in a building) which attract relief at 50% rather than the usual 6% writing down allowance. 

Super Deduction or Annual Investment Allowance?

In order for a company to optimise its capital allowance reliefs, AIA should be carefully considered alongside the super deduction.

Taking an example, where a company in the Food & Drink sector invested:

  • £100k in industrial cooking equipment, and
  • £200k in integral features (such as the electrical, heating and water systems in a building)

in the year ending 31 December 2022, what would be the best way to get as much tax relief on these assets and reduce the company’s tax bill?

  1. Firstly, any qualifying loose plant and machinery should always use the 130% super deduction as this is the highest capital allowance relief possible (30% more so than AIA). Therefore, a super deduction of £130k will be available on the industrial cooking equipment in the year of purchase – saving £25k of corporation tax.

  2. Next, the full AIA entitlement should be used up. As the AIA limit is £1m for the year ending 31 December 2022, the £200k integral features should use up some of the AIA entitlement and receive a 100% deduction in the year of purchase. 

  3. Finally, if there is any excess capital expenditure on special rate items above £1m (not applicable in this case), the special rate super deduction should be claimed and receive 50% relief in the year of purchase.

For capital investment projects it is really important to understand and take advice on the interaction between these different classes of tax relief.

In addition, if investment includes work on a building, use of the Structures and Buildings Allowance also needs to be considered.

Be aware, however, the super deduction does not apply to second hand assets or cars and is only available to companies subject to corporation tax, not individuals, partnerships or LLPs.

The key take away from this article should be not to delay investing in your company’s capital expenditure until the increase in corporation rate in April 2023.

The super deduction is designed to make the equivalent relief available now for larger companies who will pay the 25% tax rate, and should represent a real saving for smaller companies who might still be subject to tax at 19%.

With capital investment needing careful planning and with lead times with equipment manufacturers, now is the time to act.

Further information

If you would like to discuss this further, please contact a member of our Business Tax team or Food & Drink sector team.

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