The super deduction tax break: invest in capital equipment!

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The super deduction is a record-breaking opportunity and at such a critical time a significant cashflow bolster can’t be missed.

The break allows businesses to reduce their corporation tax liability by 130% of the value of any investment they’re making in the next two years, on compressed air systems.

What is the super-deduction tax break?

Companies will be eligible to claim a deduction from their tax bill if they invest in compressor systems for their business. Under the super deduction for qualifying expenditure incurred from 1st April 2021 up to and including 31st March 2023, companies can claim:

  • 130% deduction on most new plant and machinery investments, that ordinarily qualify for the 18% main rate writing down allowances.
  • First year allowance of 50% on most new plant and machinery investments, that ordinarily qualify for 6% special rate writing down allowances.

Which equipment and companies qualify?

The range of qualifying equipment stretches through a variety of different technology:

  • Air compressors
  • Dryers and gas generators
  • Vacuum pumps
  • Low pressure equipment

Despite this, their are exclusions, such as structures and buildings and equipment that landlords install. As well as this, leased plant and equipment will need to be dealt with carefully, as this may also be subject to restrictions.

All companies within the charge to corporation tax on or after 1st April 2021 will be suitable for the super deduction tax break.

Equipment already on order

If you have an umbrella agreement in place already for the equipment and you’re drawing down equipment from that, this wouldn’t be covered. Therefore, if you have already contracted the purchase, that also won’t be eligible for the super deduction.

Working practice examples

Example one:

  • A company incurring £1m of qualifying expenditure decides to claim the super-deduction.
  • Spending £1m on qualifying investments will mean the company can deduct £1.3m (130% of the initial investment) in computing its taxable profits.
  • Deducting £1.3m from taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill.

Example two:

Previous system

With super-deduction

  • A company spends £10m on qualifying assets
  • Deducts £1m using the AIA in year 1, leaving £9m
  • Deducts £1.62m using WDAs at 18%
  • Deductions total £2.62m – and a tax saving of 19% x £2.62m = £497,800
  • The same company spends £10m on qualifying assets
  • Deducts £13m using the super-deduction in year 1
  • Receives a tax saving of 19% x £13m =£2.47m
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