What is the Capital Allowances Super Deduction?

Remember Covid … OK maybe you don’t want to cast your minds back to then. However, you’ll probably be aware that the government brought in multiple different measures to try and help businesses through it financially.

One such measure was the capital allowances super deduction for limited companies and it ends on the 31st March 2023. It was introduced to try and ensure that companies continued to invest and grow even throughout this tricky period.

To understand this support first we need to understand the difference between capital expenditure and operating expenditure.

CAPEX vs OPEX

Capital expenditure is money you spend on things in the business that are going to continue to bring in revenue into the business for a long period of time or increase the prospects of the business over a long period of time. It’s normally larger in value than your normal expenses and you’re probably going to keep hold of it for a longer period of time. For example things like a laptop, desk, van, camera etc.

These assets will be detailed on the business’s balance sheet and the value will depreciate over the life of the asset.

Operating expenditure is your normal day-to-day expenses of running the business. Normally lower value and will contribute to the business for a shorter period of time than the capital expenditure. For example – postage, Canva subscription, business coaching, wages, and utilities.

Operating expenditure gets taken away from your revenue to calculate your profit. Profit is what we use to then calculate what tax we pay.

Capital Allowances

As the capital expenditure goes to the balance sheet not the profit & loss account it doesn’t get deducted from the revenue to reduce your profit & tax balance.

However, this is where Capital Allowances come in. Capital allowances are a tax relief which allows you to deduct a proportion of your capital assets against your profits so that it’s taken into account when calculating the tax you owe.

There are different types of capital allowances available, including the Annual Investment Allowance (AIA), the Writing Down Allowance (WDA), and the First-Year Allowance (FYA).

The AIA provides 100% tax relief on the first £1 million of capital expenditures on qualifying assets per year. This means that businesses can deduct the full cost of qualifying assets from their taxable profits, up to a maximum of £1 million per year.

The WDA provides tax relief on capital expenditures that do not qualify for the AIA. The WDA rate varies depending on the type of asset and the date it was acquired. The WDA is calculated on a reducing balance basis, meaning that the percentage of the remaining balance that can be claimed decreases each year.

The FYA provides 100% tax relief on qualifying expenditures for certain assets in the first year of purchase. This includes zero-emission cars and energy-saving equipment.

It’s important to note that not all capital expenditures qualify for capital allowances, and the specific rules and rates change over time.

So what is the super deduction?

The super deduction is available to companies that make qualifying capital expenditure between April 1, 2021 and March 31, 2023. This includes items such as computer equipment and office furniture but excludes assets such as buildings, land, and second-hand equipment.

Under the super deduction, businesses can claim a tax deduction of 130% of the cost of qualifying assets in the first year of purchase. This means that for every £1 spent on qualifying assets, businesses can reduce their taxable profits by £1.30, resulting in a significant tax saving.

For example, if a company spends £1,000 on a new laptop, they can reduce the company’s profits by £1,300 hence reducing the tax the company would have to pay.

So what should I do?

If you are a limited company and you are thinking of buying a capital asset in the next couple of months. Check with your accountant whether the asset you intend to buy would qualify for this super deduction and consider whether you have the cash flow to purchase the asset before the 31st March so that you can take advantage of this additional tax relief.

If you don’t currently work with an accountant and/or are looking at switching why not book in a free 20 min discovery call to see if we’d be a good fit.