How can SMEs benefit from the super-deduction tax break?

Boosting UK business investment

Covid-19 is threatening to widen the UK’s productivity gap. Compared to similar countries that the UK competes with in export markets, the UK has received low levels of business investment, which has led to a decrease in productivity growth since 2008.

The super-deduction, alongside many other measures set out in the 2021 budget, is designed to reverse this trajectory by stimulating business investment. 

It provides companies up and down the country with the incentive to grow their businesses by investing in new assets. Understandably, many business owners have put their growth plans on hold due to the pandemic. The super-deduction will give businesses the confidence to set these plans into action without further delay. 

The super-deduction is set to increase the level of business investment by 10 per cent (around £20bn a year) at its peak, according to the Office for Budget Responsibility (OBR).

What is the super-deduction and how does it work?

The super-deduction will run from 1 April 2021 until 31 March 2023. 

During this period, companies can claim 130 percent of what they spend on qualifying plant and machinery assets against taxable profits. This will enable businesses to reduce their tax bill by up to 25p for every £1 they invest.

The super-deduction offers 130 percent first-year relief on eligible equipment investments. So, if you spend £100,000 on equipment for your business, the corporation tax deduction will be £130,000. Corporation tax relief at 19 per cent on £130,000 is £24,700.

Usually, this type of expenditure would fall into your business’ Annual Investment Allowance (AIA) and result in a relief of £19,000 (£5,700 less than with the super-deduction). 

Super-deduction example

The owner of a manufacturing company is considering investing £1 million in eligible machinery that will put their business at a competitive edge and enable them to innovate. 

If they go ahead with the purchase, they’ll be able to deduct £1.3 million from their business’ taxable profits. Until April 2023, Corporation tax is set at 19 per cent. So, this means the manufacturing company will save £247,000 on its tax bill. 

What counts as eligible “plant and machinery” purchases?

We tend to associate the terms “plant” and “machinery” with industrial assets such as heavy machinery and vehicles. However, the super-deduction should cover a wide range of assets, including (but not limited to):

• Solar panels 

• Computer equipment and servers 

• Tractors, lorries and vans

• Ladders, drills and cranes 

• Office chairs and desks

• Electric vehicle charge points 

• Refrigeration units 

• Compressors 

• Foundry equipment

For more information on the eligibility of different types of investments for different capital allowances, see the UK Government’s super-deduction factsheet. 

How can I fund my asset purchase?

You can use one of the many unsecured business finance lenders on our panel to fund the purchase of your asset and be eligible for the scheme. 

Alternatively, you could apply for asset finance. As many as one in five SMEs rely on business funding, such as asset finance to fund purchases. 

At the moment, it’s not 100% clear as to whether the 130 per cent tax break includes assets acquired through hire purchase or asset finance. In other words, more detail is required in the legislation on whether asset finance can be used.

How asset finance works

Asset finance is a type of business finance that allows you to access assets like machinery and vehicles without having to purchase them outright. It’s designed for businesses that want to grow but don’t have large amounts of ready cash to spend on equipment. 

With asset finance, you can spread the cost of the asset over a set period of time. There are a few different types of asset finance available, including:

Equipment leasing - allows you to rent an asset for a period of time.

Hire purchase - allows you to buy an asset by paying in instalments over time.

Finance leases - allows you to rent an asset for most of the item's useful life.

Operating leases - allows you to rent an asset for a fraction of the item's useful life.

Asset refinance - allows you to raise cash against an asset your company already owns.

Funding Options has partnered with over 120 finance lenders, many of which specialise in asset finance. The British Business Bank has chosen us to help SMEs like yours find the right type of finance. Find out if you could be eligible for asset finance today.