Annual Investment Allowance & the Super-Deduction

Based on Rishi Sunak’s comments in the October Budget, the message is clear, the UK Government are encouraging businesses to invest in equipment, with the extension of the Annual Investment Allowance. Business investment will be rewarded and encouraged, with the aim of allowing businesses to thrive following the pandemic.

Catch up on our initial views of the key budget points in our blog.

Annual Investment Allowance

The main take away point for businesses was the retention of the £1 million annual investment allowance (AIA) until 31 March 2023.

The £1 million AIA was due to revert back to the lower allowance of £200,000 from 1 January 2022, but the announcements in the Budget have extended this to 31 March 2023. This allowance applies to expenditure on qualifying plant and machinery incurred on or after 1 January 2019.

Transitional rules will apply to accounting periods that span 1 April 2023.

The extension of the allowance allows for businesses to potentially accelerate their expansion plans and claim the increased AIA to the limit of £1 million.

The extension of the AIA aligns with the Super-Deduction, which was announced earlier in the year.

What is the Super-Deduction?

The 130% super-deduction capital allowance provides a tax saving of 25p for every £1 spent on new qualifying plant and machinery investments. The deduction has been available since the 1 April 2021 and runs until 31 March 2023. Unlike the AIA which has a cap of £1 million, the super-deduction is uncapped.

As you can see above, under the new rules, for every £100,000 spent on qualifying plant and machinery a company stands to save an additional £5,700 in tax.

What qualifies for the Super-Deduction?

Potential expenditure that qualifies for the relief at 130% would be assets that fall into the main pool for capital allowances, which includes:

• Plant & Machinery
• IT and office equipment
• Commercial vehicles

However, certain expenditure, such as cars are specifically excluded from the 130% super-deduction.

Interaction between the Super-Deduction and the AIA

Where expenditure would typically fall into the special rate pool for capital allowances, for items such as air conditioning, electricals, water systems etc, these items can only qualify for relief at 50% under the super-deduction. For these types of items, if a business has some AIA remaining then it would be beneficial to claim via AIA to get full relief.

If there is no AIA available, then it is worthwhile claiming the 50% super-deduction instead of the normal writing down allowance, which would only provide relief at 6% per annum.

Speak to Shorts

There are still many considerations to be made when purchasing an asset or looking to claim either the AIA or the super-deduction. Shorts team of tax specialists are at the cutting edge of all things tax, and the super-deduction is no exception.

If you have any questions relating to the policies, or would like assistance in reviewing your current investment plans. Shorts are happy to advise on changes to implement a long-term tax efficient strategy. Contact our team today!