Last reviewed 8 June 2021
Companies looking to invest in energy savings or on-site renewables should consider the government’s new “super-deduction” investment incentive. John Barwise explains.
In the 2021 spring budget, Chancellor Rishi Sunak announced a new investment incentive to promote a speeding up of business investment following the economic impact of the coronavirus pandemic.
Referred to as the “super-deduction”, companies investing in qualifying new plant and machinery assets can benefit from a new two-year 130% capital allowance until 31 March 2023 and 50% first-year allowance (FYA) acceleration of relief for special rate (SR) pool assets.
Announcing the scheme, the Chancellor said; “For the next two years, when companies invest, they can reduce their taxable profits* not just by a proportion of the cost of that investment, as they do now or even by 100% of their cost, the so-called full expensing some have called for, with the Super Deduction they can now reduce their taxable profits by 130% of the cost.
“The Treasury states that much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to other countries and weak business investment has played a significant role in the slowdown of productivity growth for over 10 years.”
The new Capital Allowances offer
Making capital allowances more generous helps to stimulate business investment and promote economic growth.
Following the measures announced in the spring budget, businesses will now benefit from four significant capital allowance measures.
The super-deduction, which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies.
The 50% first-year allowance (FYA) for investments in special rate (SR) assets, including long life assets until 31 March 2023 for companies.
Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold, until 31 December 2021.
Within the UK’s Freeport tax sites, companies can also access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026.
Both the 130% super-deduction and 50% special rate first-year allowances are new capital allowances for investments in plant and machinery assets.
Most of the changes are only available to companies that are subject to corporation tax. Sole traders, partnerships or limited liability partnerships are not eligible, but can still benefit from the 100% relief for plant and machinery investments up to a £1 million threshold, until 31 December 2021.
SMEs can also apply for the government’s Help to Grow scheme to develop strategic skills in financial management, innovation and digital adoption.
Eligible plant and machinery
The Government’s earlier tax relief scheme, Enhanced Capital Allowance (ECA), introduced in 2011 by former Chancellor, Gordon Brown, came to an end in 2020. Under that scheme, businesses that bought plant and machinery listed on the Energy Technology List (ETL) and the Water Technology List (WTL) qualified for 100% write off of the cost against that year’s tax profits.
All products listed on the ETL are verified as meeting higher energy efficient performance standards, typically in the top 25% of products available in the market. By investing in ETL listed energy saving equipment, businesses can lower energy bills, reduce greenhouse gas emissions and shorten investment payback periods.
Most types of energy equipment listed on the ETL should qualify for either the super-deduction or 50% First Year Allowance (FYA), but it is worth checking with BEIS to find out what products qualify under which scheme.
The kinds of plant and machinery assets which may qualify include, but are not limited to, solar panels, electric vehicle charge points and energy efficient equipment such as lighting and thermal insulation.
Other qualifying assets include IT and office equipment, refrigeration units, new factory equipment such as warehouse machinery, automation, data centres and industrial handling equipment.
Examples of the super-deduction in practice
Under super-deduction, for every pound a company invests, taxes are cut by up to 25%. HM Treasury presents two examples of the super-deduction’s potential.
A company incurring £1 million of qualifying expenditure decides to claim the super-deduction.
Spending £1 million on qualifying investments will mean the company can deduct £1.3 million (130% of the initial investment) in computing its taxable profits.
Deducting £1.3 million from taxable profits will save the company up to 19% of that, or £247,000, on its corporation tax bill.
A company spends £10 million on qualifying assets
The same company spends £10 million on qualifying assets
Deducts £1 million using the AIA in year 1, leaving £9m
Deducts £13 million using the super-deduction in year 1
Deducts £1.62 million using WDAs at 18%
Deductions total £2.62 million and a tax saving of 19% x £2.62 million = £497,800
Receives a tax saving of 19% x £13 million = £2.47 million
See Budget 2021 — Super-deduction for more details.
Business groups have welcomed the chancellor’s super-deduction policy, saying that it would encourage firms to spend their money now, aiding the UK’s recovery.
Dr Adam Marshall, director general of the British Chambers of Commerce (BCC), told CityA.M. that the policy would “blunt” the impact of coming higher business tax rates.
“We particularly welcome the massive ‘super-deduction’ investment incentive that the Chancellor has put in place for the next two years”, he said.
“This responds directly to our call to encourage those businesses that can to invest and grow.”
There are some exclusions to the assets eligible for the super deduction relief, such as assets excluded from first year allowances in the past, as well as used and second-hand assets and expenditure on contracts entered into prior to 3 March 2021.
Tax relief on a building’s mains water and gas systems, or items that are leased, are also outside the scope of the of the tax relief. Investments in new buildings and hire equipment is also not covered by the main benefit, as well as equipment purchased by property landlords with incorporated rental properties.
The broad thrust of the chancellor’s super deduction allowance means that businesses that might previously have considered that investment in energy efficient products were outside their reach, might now reconsider.
Upfront costs will remain the same, but smaller SME companies should be able to build a business case for capital outlay, given the potential tax savings that come with purchasing some energy efficient equipment covered by the super deduction allowance.
The added value means that energy efficiency plant and heating systems will lead to reduced consumption, lower energy bills and smaller carbon footprints on the road to net zero.
But the devil is in the detail and it is advisable that businesses give detailed consideration to what qualifying criteria might apply to them when seeking to claim relief for certain purchases under the new scheme.
For larger companies that may be subject to corporation tax, it is worth noting that the tax relief will end before the higher 25% rate of corporation tax comes into force in 2023.
The legislation for the new capital allowance scheme is currently in draft and is anticipated to receive Royal Asset around June or July 2021.
Further details on the temporary tax reliefs on qualifying capital asset investments from 1 April 2021 can be found here.