How will the super-deduction work?
Budget announcement. The 2021 Spring Budget contained details of a new super-deduction for two years. However, there has been some confusion over which businesses will be eligible and how it will interact with the annual investment allowance (AIA).
Companies only. The first point can be cleared up relatively easily. Only businesses within the charge to corporation tax will be eligible for the super-deduction , which will apply to qualifying expenditure incurred between 1 April 2021 and 31 March 2023. The deduction will be 130% of expenditure for assets that would qualify for the main rate of writing down allowances (WDAs), i.e. most plant and machinery, and 50% for special rate assets, e.g. fixtures and integral features.
AIA. The broad scope of the super-deduction , and the fact that it has no upper limit, probably renders the AIA irrelevant for your company clients for the next two years. They can of course choose to use the AIA instead, but there would be no benefit in doing so.
Example. In the year to 31 March 2022 Acom Ltd spends £10 million on qualifying plant and machinery. Using the AIA it could deduct £1 million in the first year, then £1.62 million via WDAs in the second year. This is a maximum tax saving of just under £500,000 over both years. Using the super-deduction, Acom would deduct £13 million in the first year, a maximum tax saving of £2.47 million.
Pro advice. However, you should remind clients that the AIA is due to return to its permanent level of £200,000 after 31 December 2021, and so it will be much reduced when it does become relevant again in 2023.
Your unincorporated clients will of course continue to use the AIA. Ensure that they know they won’t qualify for the super-deduction and remind them that the AIA is falling from £1 million to just £200,000 at the end of this year.