Budget 2021: The “super-deduction” – is it really super or is it just sensible (with added spin)?

In the Spring 2021 Budget announcement on 3 March, the Chancellor announced what he has grandly termed a “super deduction” for capital allowances for companies (only).

The outline of the super-deduction is as follows:

For qualifying expenditures incurred from 1 April 2021 up to and including 31 March 2023, companies can claim in the period of investment:

  • A super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
  • A first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances

The policy objective is stated to be:

This measure is designed to stimulate business investment. It does so by increasing the incentive to invest in plant and machinery by offering higher rates of relief than were previously available.

However, if you cut through the spin – the real logic behind the super-deduction becomes a bit more obvious. It helps to stop companies delaying investment decisions until the 25% tax rate comes in. Without the super-deduction an investment made today would actually cost a company more in real “cash tax” terms than one made in 2023. And if businesses can see an investment costs more in real terms today than it does in two years time, many will defer the investment.

Why? Remember depreciation is added back in corporate tax terms in line with the accounting treatment. We can illustrate the point with a simple example based on a business which invested £750k on 1 April 2021 on qualifying expenditure and depreciated it over 5 years (so a normal depreciation policy) and so would have 3/5ths of the depreciation added back at 25%.

Without the super deduction the increase in tax rates means that the depreciation being added back and taxed at 25% exceeds the tax benefit of the capital allowances at 19%.

Without super deduction

Period end
31 March 202231 March 202331 March 202431 March 202531 March 2026Total
Capital Allowances(750,000)0000(750,000)
Depreciation150,000150,000 150,000 150,000 150,000 750,000
Tax Adjustment(600,000)150,000150,000150,000150,0000
Tax Cost / Saving @ 19%
(114,000)28,5000
0
0
(85,500)
Tax Cost / Saving @ 25%37,50037,50037,500 112,500
Total tax cost / (Saving)27,000

By adding the super-deduction it improves the cashflow back to positive and the impact is greatest the earlier that a business invests (as a greater amount of depreciation will be added back at 19%).

With super deduction

Period end
31 March 202231 March 202331 March 202431 March 202531 March 2026Total
Capital Allowances (Super Deduction)975,0000000(975,000)
Depreciation150,000150,000 150,000 150,000 150,000 750,000
Tax Adjustment(825,000)150,000150,000150,000 150,000(225,000)
Tax Cost / Saving @ 19%
(156,750)28,5000
0
0
(128,250)
Tax Cost / Saving @ 25% 37,500 37,500 37,500 112,500
Total tax cost(15,750)

*The tax benefit illustrated here is based on the assumption that the company has a taxable profit after capital allowances.

The real messages

The real messages for the super-deduction should be:

  • Without it – it would have cost companies in real terms to invest in plant and machinery before 31 March 2023 and some businesses would have put off investment as a consequence
  • The super-deduction is only really super if you invest early for expenditure incurred after 31 March 2023 and once the super-deduction ends then businesses should expect to get 100% relief in the normal way through AIA and 18% allowances as allowances and depreciation will match off
  • It only applies to companies as only corporation tax rates are going up – it is just there to offset the impact of the increases (and so no super-deduction is needed for non corporates – as their tax rates aren’t going up)

So probably not super, probably more accurately described sensible. The sensible-deduction – going live from 1 April 2021.

Contact us

For further information, please contact Alastair Wilson at alastair.wilson@taitwalker.co.uk.