To encourage businesses to invest in new equipment and furniture the Government has introduced the 130% Super Deduction.
Basically businesses can apply a 130% tax deduction on qualifying purchases in year one. This means that if you were to spend £100,000 on, for example, new office furniture you can then reduce your taxable profits by £130,000 in the first year. This will give you a tax saving of £24,700 (19% corporation tax on £130,000).
WHAT PURCHASES CAN QUALIFY FOR THE SUPER DEDUCTION?
Purchases that will qualify for the 130% Super Deduction come under the category of Plant and Machinery which includes:
office furniture including desks, chairs, meeting pods, storage units etc
office equipment including computers, laptops, printers, copiers, servers etc
warehouse equipment including racking, shelving, forklift trucks, handling equipment
factory and manufacturing equipment such as CNC machines, compressors, generators etc
PV and EV equipment such as solar panels and electric vehicle charging points
Commercial vehicles including lorries, vans, tractors and pickups
And more – check with your accountant for guidance on specific items
CAN YOU USE FINANCE OR LEASING TOGETHER WITH THE SUPER DEDUCTION?
The answer is Yes you can! There are additional conditions that must be met for investment in plant or machinery using a finance or leasing scheme together with the Super Deduction. The interesting thing is that you can make substantial investments using a hire purchase scheme or similar with no cost in year one if you also apply the Super Deduction.
HOW COULD YOU BUY FURNITURE OR EQUIPMENT WITH NO INITIAL COST?
To explain how you could use both the super deduction together with a finance or hire purchase arrangement we have prepared a worked example.
You buy £100,000 of Plant or Machinery.
You use Hire Purchase to finance the investment and spread the cost over 5 years. Typical cost per month would be around £1883. This gives a total cost over 5 years of £112,280
You use the 130% Super Deduction to reduce tax by £24,700 in year 1.
Therefore an investment in qualifying plant or machinery costing £100,000 would cost £88,280 overall. There would be a cash gain of £2104 in the first year followed by expense of £22,596 for the last 4 years.
ARE THERE ANY CONDITIONS ON USING THE SUPER DEDUCTION?
Yes, there are conditions on using the Super Deduction.
Firstly the purchases have to be made by a company or organisation that pays corporation tax. It is not available to private individuals or partnerships. Also to have any benefit you need to have made sufficient profit to set the deduction against.
Any equipment or items purchased must be new and not second-hand, used or refurbished.
There are certain items that excluded for example company cars although commercial vehicles such as lorries or vans are included.
The purchase must be made or expenditure incurred from 1st April 2021 up to 31st March 2023.
There are additional conditions that apply if you are financing the purchase using hire purchase or leasing. These additional conditions include:
The company acquiring the asset via a qualifying finance agreement is also the one using the item. This is to ensure that the benefit of the super deduction goes to the business making the investment rather than the lender or leasing company.
The finance agreement is one where the company obtaining the equipment eventually owns the equipment. This would obviously apply to a hire purchase agreement and potentially a finance lease where there is a clear option to purchase included in the contract. It would seem that it would not apply to a contract hire agreement as the equipment remains in the ownership of the leasing company and there is no explicit option to purchase.
Any information provided in this article is only our interpretation of the rules around the application of the super deduction announced in the March 2021 budget. We strongly recommend that you obtain advice from your accountant or tax advisor for your own specific circumstances. Any finance or leasing costs provided are indicative and will be subject to standard credit checks and current rates.
Hopefully this article has been useful in giving some guidance on the how the new Government Super Deduction can be used to reduce tax and improve cash flow.
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