Why the super deduction is a capital idea

We examine the recent Budget from a manufacturing perspective.

Whilst there was an overriding theme of frozen thresholds and increased tax rates during Rishi Sunak’s spring Budget, we are all aware that economic growth is vital to catalysing a resurgence in the country’s economic fortunes. 

As such, one of the most striking phrases in his speech was that of an “Investment-Led Recovery”, and his showpiece tool for this was the “Super Deduction”. 

But just how super is this deduction, and what is in place to allow businesses to offset their capital expenditure currently?

Although it has been billed by some as “The Amazon tax cut”, Mr Sunak must certainly have been thinking of the UK’s manufacturing sector when formulating his super-deduction idea. 

His headline-grabbing relief offers a 130% first year deduction on qualifying capital expenditure (normally only attracting 18% writing down allowances (WDAs)), which he boasted could ultimately reduce a company’s tax bill by up to 25p for every £1 spent between 1 April 2021 to 31 March 2023. 

In addition, the Chancellor also unveiled a 50% first-year allowance (FYA) for special rate (including long life) assets (normally only attracting 6% WDAs) until 31 March 2023 for companies.

This is on top of the pre-existing 100% Annual Investment Allowance (AIA) on a maximum of £1m expenditure (dropping to just £200,000 from 1 January 2022).

Illustration

To illustrate the point. 

If a manufacturing business investing £4m in a single year on an upgraded production line should have done so in December 2020 (pre the super deduction), they could expect to use the AIA and WDA to claim a first-year tax reduction of £292,600 (i.e. £1m AIA + £3m @ 18% WDA (= £540,000). Total £1,540,000 @ 19%). With smaller deductions available until the entire £4m cost has been relieved at 19%.

However, if the same company were to instead spend the same £4m in April 2021, they could potentially expect a whopping first year deduction of £988,000 (i.e. £4m x 130% = £5.2m @ 19%).

While tax relief has been accelerated significantly, the total tax saving is also £228,000 (i.e. £1.2m uplift x 19%) higher under the new scheme (although some of this will change in the planned increase in corporation tax rate from April 2023). 

A super-deduction indeed! 

Qualifying expenditure

This deduction will be available for most new plant & machinery including computers, vans, software, and other machinery, but unfortunately, it will not be available for cars.  

So, it appears that we are approaching a very good time to invest in plant & machinery, but does that help manufacturing businesses looking to upgrade their premises and systems more generally?

Integral features such as electrical systems, water systems and heating systems have also received a bumper new tax deduction, moving from a 6% WDA to a 50% first year deduction.

This means that for a business (without AIA available) investing £10,000 in a new boiler system for example, the first-year tax reduction available has increased from a paltry £114 (£10,000 x 6% x 19%), to a vastly improved £950 (£10,000 x 50% x 19%).

Additionally, although it was not mentioned in this Budget, it is worth noting that should a business be undertaking significant renovations to its premises, or even purchasing newly constructed premises, it can claim a 3% deduction on a yearly basis through the Structures and Building allowance.  

As such, it appears that although there may have been freezes elsewhere in the Budget, Mr Sunak’s talk of an “Investment-Led Recovery” is not entirely hot air on his part, as the tax reliefs available on capital expenditure are now significantly more generous.  

As such, if businesses are on the fence about renovating their factory premises or investing in new production software, the potential cashflow benefits of the expanded reliefs are now certainly a strong argument to do so.

If you are thinking about investing in your business, please feel free to contact our manufacturing team.

We will be more than happy to have a conversation with you about maximising tax reliefs available to your business.

For more information on the Manufacturing sector, please visit our Manufacturing Knowledge Hub.