Company super-deductions and tax increases

One of the more innovative aspects of the recent March budget was the introduction of the rather grandly named super-deduction.

Limited companies that invest in qualifying assets in the two-year period 1 April 2021 to 31 March 2023, will be eligible for a 130% tax write-off.

What this means is that if you buy say a new computer system for £5,000 you will be able to claim a £6,500 write-off against your taxable profits.

Note, the reduction is in the amount of profit subject to corporation tax. The 130% is not a deduction from tax payable.

In our example, the capital purchase of £5,000 would be converted into a super deduction of £6,500 that would reduce corporation tax by £1,235 (£6,500 x 19% - the current rate of corporation tax).

Interestingly, the tax saved of £1,235 is almost 25% of the £5,000 investment. You may remember that the Chancellor advised, in the same March budget, that he is considering raising corporation tax to 25% from 1 April 2023, the date on which the 130% super deduction ends. Large companies with profits more than £250,000 will pay the 25% rate.

Smaller companies will continue to pay a lower rate of 19% if profits less than £50,000. No doubt this will lead to complex marginal rates being applied to companies with taxable profits between £50,000 and £250,000.

Clearly, the Chancellor wants businesses to invest during the next two years and this tax incentive will help to smooth the way.

Businesses tempted to make larger investments need to consider how the assets will contribute to rebuilding their businesses after the recent, and prolonged, COVID disruption. It is useful to make the most of these tax incentives, but the purchase of capital assets needs to create additional profits.

Readers who are considering capital acquisitions would be wise to seek advice before placing orders to make sure that all aspects of their investment are carefully considered. We would be delighted to help.