Capital Allowances - plant & machinery

'Super deduction' may not be so 'super' in reaching a decision on buying plant and machinery.

Our practical advice to company clients has traditionally been:

“If you need to replace plant and machinery to allow your business to continue trading profitably and grow, then don’t hang around asking when is the best time to buy the new equipment from the tax perspective; buy it now and don’t worry about the tax relief.”

However, if it is more of 'I am thinking about buying a new digger in the next few months' type of question, then our advice would have been, “It is better to buy just before rather than just after the year end; as this will bring forward by 12 months the tax saving made on the investment."

But with the forthcoming tax rate increase to 26.5% for lots of small businesses (and no it’s not a typo, as this will be the effective tax rate for profits in the £50,001 to £250,000 band) the answer could be totally different: “Buy just after the year end, not just before and you will save tax."

It sounds counter intuitive to give up the benefit of the “Super Deduction” but this is the reality small business owners will be facing in early 2023.

Using an investment of £10,000 in an asset that qualifies for the “Super Deduction” as an example, and assuming profits are £100,000:

Buying the day before the tax changes come in will save £2,470 in tax. This is £1,900 in tax saving for the usual 100% deduction in working out taxable profits and a further £570 saving arising from the “Super deduction”.

But what will the tax saving be the day after the corporation tax rate changes and the “Super deduction” ends? If you are paying tax at 26.5% the answer will be a tax saving of £2,650.

So, for a lot of small businesses, the question to be asked by accountants is:

 “Would you rather reduce your tax bill by £2,470 now or wait 12 months to save £2,650 in tax?”

Potentially for a lot of clients the illusion of a 'Super Deduction' may become a 'Super Addition' to their tax bill.