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For UK SMEs and the British economy, one of the most significant announcements in the Budget was the so called “Super Deduction”: a significant capital expenditure allowance of 130% for qualifying plant and machinery expenditures made between 1st April 2021 and 31st March 2023.

Beyond the headlines at the time, we look at how the Super Deduction works in details and its implication for SMEs looking to invest into their growth this year.

Super-deduction and its financial implications

Main Pool - Plant & Machinery Prior to April 2021 From April 2021 to March 2023
Investment CapEx 100.00 100.00
Year 1 Deduction on Tax Paid (19%) 3.42 24.70
Year 2 Deduction on Tax Paid (19%) 2.80 0.00
Absolute Tax Credit (on 30% of CapEx) N/A 5.70

Prior to the new budget, an SME spending 100 on qualifying assets could deduct 18 in Y1 through the Writing-Down Allowance (WDA), and 14.76 in Y2, saving a total of 3.42 in tax in Y1 and 2.80 in Y2.

With the Super Deduction in place, the same company making the same investment could make a 130 deduction in Y1, saving 24.70 in tax in Y1. In other words, for every £1 invested, the company’s tax bill drops by 25p. However in Y2, there is no Pool Carried Forward and the tax saving is nil. 

Therefore, the impact of the Super Deduction is two-fold:

  • For 100% of the CAPEX amount, the Super Deduction is an acceleration into the first year of the tax savings that would otherwise have occurred over time. This will help companies finance 24.37% of their CAPEX program in the very short term.
  • For 30% of the CAPEX amount, the resulting tax savings are in addition to the savings that would have otherwise occurred. This can be seen as an absolute tax credit and therefore a permanent financing of 5.7% of a CAPEX program.

Make UK recently estimated that a quarter of the surveyed companies plan to increase investment as a direct consequence of the Super Deduction

Build Back Better

This generous expenditure allowance in conjunction with the other schemes should help the UK to achieve an investment-led recovery. For companies looking to accelerate their investment program this year and next year, the Super Deduction is certainly one step in the right direction.

Depending on the investment horizon, 75% to 94% of a CAPEX program needs to be financed, either through a company’s cash flow or thought third-party financing. This is where the Private Debt market comes in.