In a country wrought with uncertainty from the Coronavirus pandemic, the UK government now wrestles with the challenge of waking the sleeping economy from its slumber.
As a result of the repeated strong lockdown policies, many businesses were forced to close their doors temporarily, some for good. This has contributed to a relatively poor UK economy since the pandemic struck.
So, how do we rescue the situation?
Well, it is hoped the solution could lie within the new ‘super deduction’ tax scheme, that offers incredible benefits to any business purchasing scheme-applicable equipment.
This could then potentially generate enough investment to stimulate the UK economy, getting us back on our feet again.
Which is all well and good, in theory…
What is the super deduction tax break?
The ‘super deduction’ is a massive UK-wide tax break announced in early March. It is hoped that this will cause an increase in investment by essentially providing 25 pence off of company tax bills for every pound of qualified spending.
Rishi Sunak, Chancellor of the Exchequer, spoke to parliament not long following this announcement, on the 9th of March. He said that he truly believed that the super deduction tax breaks will bring forward business spending for two years but will also
“… increase the amount of investment aswell.”
According to the Office for Budget Responsibility (OBR), at its peak, super-deduction tax breaks will raise the level of business investment by 10% – roughly equal to £20bn a year.
How super deduction works
Super deduction hopes to stimulate business investments by offering 130% first-year relief on any qualifying main rate plant and machinery investments. The length of the scheme is set to be from April 1st 2021, all the way through to March 31st 2023 for all UK companies. This offers plenty of time for businesses to make informed, well-planned decisions with their purchases.
This translates to a deduction of 130 per cent of the expenditure incurred. For an example spend of £100,000, the resulting corporation tax deduction will be to the tune of £130,000. This gives corporation tax relief at 19% on £130,000 – which is £24,700.
Usually, this expenditure would fall within a businesses’ AIA. This would only provide tax relief of about £19,000 or alternatively be tax-relieved at 18% of the cost per annum.
Source: swoopfunding.com
As always, the UK government has been swift to produce online resources to help explain to potentially applicable businesses. For any further information on how the tax break scheme will work and operate, it is advisable to head to
www.gov.uk/guidance/super-deduction
What equipment can I claim super deduction against
Unfortunately, it is not every single type of asset that qualifies for this scheme. The type of equipment that qualifies for super deduction include, but are not limited to:
Source: smallbusiness.co.uk
Is super deduction compatible with asset finance?
This is still an area of confusion, and rightly requires some attention.
Although the scheme is generally well understood across the UK, this is one area that questions appear to be focussing on in particular.
In the draft legislation for the super deduction scheme, any plant and machinery investment incurred under ‘a hire purchase or similar contract’ will have to meet additional conditions in order to qualify for the tax break. This will affect small and medium sized enterprises in particular.
The confusion arises from who the 130% tax break actually applies to. The implication is that the tax break excludes hire purchase or asset finance arrangements as the deduction only applies to “the person to whom (the equipment) is bailed or hired is the person who incurs the expense”.
Source: smallbusiness.co.uk
Who does this rule affect most?
As already alluded to in the previous section, this is fine print that only really applies to small and medium-sized businesses. Often smaller businesses do not have the same incredible cash reserves as huge national operations, and as such may need to rely on other methods of purchasing.
More than one in five small and medium-sized businesses use asset finance or hire purchase when looking to invest in new equipment, according to The Times.
Source: thetimes.co.uk
The Finance and Leasing Association have stated that the ‘additional conditions’ are there entirely to ensure that the benefits of the super deduction tax break go directly to the business customer instead of the lender.
This does not mean hire purchase cannot be used.
Additional conditions
So, what are some of these additional conditions that keep being mentioned? We’ll list a few below:
- that you are paying a periodical sum and in return plant and machinery assets are “bailed” (hired) to you
- that eventually, you can end up owning those assets (such as by exercising an option to purchase or paying a fee)
- that the person who hires/receives the goods is the one incurring the expenditure (i.e. paying for the contract). This makes sure that the benefit of the deduction goes to the small business rather than the lender.
These stipulations look set to ensure the benefits of the tax break are passed onto businesses rather than lenders.
Is it possible to use the super deduction for second-hand goods?
Another area of concern for small to medium-sized businesses, who may only have the purchasing power for second hand/used equipment, is whether the tax breaks will apply for these purchases.
In short, no.
According to Andrew Frost of Genesis Asset Finance, a huge change from the parallel Annual Investment Allowance (AIA) is the fact that used equipment is now excluded.
What does this mean for the energy industry?
Thanks to the new super deduction tax breaks, it is now easier for many UK businesses to hit their Net Zero commitments just a little easier. You may have noticed some green energy technology in our list of approved equipment, which moves the technology within reach of many. The new tax breaks cut the upfront cost of investing in low carbon energy infrastructure, making it that much more attainable.
The types of energy equipment included in the super deduction tax break includes, but is not limited to:
- Solar Panels
- Energy Storage Equipment
- Electric Vehicle Charge Points
- Combined Heat and Power (CHP)
- Heat Pumps
The super deduction tax breaks look set to be most beneficial for projects with slightly higher capex costs and lower operation costs, which most renewable infrastructure projects are. Installing on-site photovoltaic generation in tandem with an energy storage system could convert annual energy costs into a super-deductible long-term investment.
Source: invinity.com
Interested, but don’t know where to start?
Good thing there is a group of energy experts with a wealth of experience, ready to tackle the energy industry on your behalf.
At Energy Solutions, our energy experts are kept up to date with the latest developments and world news to calculate what this means for us, and for our customers.
What does this have to do with super deduction?
Well, if you are looking to invest in green equipment such as solar panels or other energy investments, and want to get the most out of your super deduction tax break – it may be worth getting in touch with us.
We can be reached at all usual UK office hours on 0131 610 1688, via webform, or by email at nick@energybrokers.co.uk.
We look forward to hearing from you!
Google Snippets
What is super deduction?
Super deduction is a UK wide tax break scheme aimed at businesses in the hope to stimulate investment recovery, post-coronavirus.
How does super deduction work?
The super deduction offers 130 percent first-year relief on any qualifying main rate plant and machinery investments from April 2021 through to March 31 2023.
Who is super deduction good for?
Super deduction is aimed at all UK businesses and can be used by many. Any businesses that rely heavily on machinery or equipment look to benefit strongly.
What does super deduction apply to?
Super deduction applies to a spectrum of equipment and assets, including but not limited to: solar panels, computer equipment and servers, tractors, lorries, vans, ladders, drills, cranes, office chairs and desks, electric vehicle charge points, refrigeration units, compressors, and foundry equipment.
Can I use super deduction on second hand goods?
No, super deduction does not apply to second hand goods. This is one large difference to the Annual Investment Allowance.