Super-deduction tax relief put under the microscope

Imagine this. You’re sat on the edge of a plane, ready and prepped to do a skydive. You get up to 10,000ft in the air. You’ve come to jump and have been mentally psyching yourself to do so. But you can’t. Not straight away. You need encouragement from your companion, your friendly and trusted expert, before you edge closer and, finally, take that leap. That would be the case for most of us anyway.

Strip that back and what you’re reading right now is actually an analogy and a comparison of what this newly introduced super-deduction tax relief is to manufacturing firms up and down the UK, states Malcolm Little, managing director, Advanced Dynamics.

In the article below, he sets out to put the new tax relief scheme into perspective….

This new super-deduction tax relief, announced by Chancellor Rishi Sunak as part of the latest Budget last month, is just like that friendly skydiving expert giving us the encouragement we need to jump from that plane.

Instead of someone in skydiving gear, though, it’s a helping hand from the Government to manufacturing businesses that are clambering back to their feet again after a difficult 12 months. It’s an added incentive to grow and invest and get more money back in the process - money that can be contributed to other areas of the company, like wages or training.

Caution is the key word

As good as this new super-deduction sounds, though, it’s important to heed caution. Yes, it’s a great incentive, especially if you’re a manufacturing firm that had growth plans already in place. Go and fill your boots. There hasn’t been a better time to do so. If not, however, I’d urge strongly against this being the defining factor and driving force behind your business decision-making.

As a headline grabber, it’s eye-catching, but let’s put the new Super Deduction tax relief into perspective. Let’s lay this super-deduction tax relief out in its simplest form.

As of 1 April, manufacturers are now able to offset their expenditure towards new qualifying plant and machinery asset purchases by 130% for the next two years - until 31 March 2023 - and applies to any business that is spending capital, up to the tune of £1 million.

In terms of the size of the business, there is no limit. Although the guidance stipulates that a business must be paying corporation tax to apply for this super-deduction. Given it spans over two years, it also eliminates rushing and making uninformed, knee-jerk, decisions.

Having analysed this, the super-deduction tax relief is a great boost for businesses that were planning on spending that money anyway, but it’s not a huge change - certainly not as huge as what some business owners out there may be thinking when they saw the announcement.

The truth is it’s not going to make or break projects

Essentially, if you’re spending £100,000 on a project, you’re saving yourself £5,700. If you’re spending £1,000, you’re saving £57. That’s the reality. It’s those that spend £1 million on projects - at which point you’re saving £57,000 - that’s when you will see a big difference.

Broadly speaking, the tax benefit equates to 5.7% above normal rates. That’s not enough incentive to really push businesses to get back on their feet.

As an initiative for businesses to reduce their tax bill, it’s a nice option to have. As a headline-grabber, it’s eye-catching. But if I was a business owner that was split on whether to invest in new machinery, I wouldn’t be swayed by it. It’s an incentive, but don’t let it be your business decision-maker

Unique proposition

Within our industry, there’s never been anything like this: an increased tax allowance against capital spend. The biggest change we have seen is the limit you can claim against increasing from £250,000 to £1 million. But there has never been an initiative like this where the government was allowing businesses to claim more of the cost of the unit against tax.

Ultimately, you’ve got to be in a position to spend, in order to get anything back. It’s important to remember, as well, that businesses aren’t going to see a penny of the saving they’ve made through the super-deduction tax relief until January 2023 when they pay their tax bill.  

I’m not going to talk this scheme down. It’s a positive for our industry, but any decisions taken have to be done so with the broad perspective of whether you, as a business owner, already had the intention to grow the business.

All this tax relief will do is give some business owners the final push they needed to take the plunge and invest. It is a benefit, without a doubt, but it isn’t transformative.

The VAT factor

Speaking for the wider industry, looking at VAT would have been a big thing and would have had a significant impact. That sounds great, but, looking at the bigger picture, it would have cost the Government millions, whereas that’s not the case with the super-deduction tax relief.

In the grand scheme of things, the Government has incurred a huge outlay during this pandemic. As a nation, we don’t have a bottomless pit of money, and a lot is still being attributed to the furlough scheme and keeping as many businesses operational and as many people in work as possible.

There has to be a balanced view and this super-deduction tax relief is, probably, the fairest solution our industry could have asked for at this time. If your intention was to grow, there hasn’t been a better time to do it.

And so, after such a difficult period over the last 12 months, this new super-deduction tax relief is a welcome incentive and will play a significant role over the next two years in helping many manufacturers climb back to their feet and grow again.

Sound business case?

But for many business owners, it needs to be taken with a pinch of consideration. There always has to be a sound business case behind what you want to do when it comes to growth.

If you’re an owner that had already decided that you want to invest in something for your factory, like a mixer, a printer, a capping and filling machine, dive in. There hasn’t been a better time to do it. If not, though, do not let this new incentive sway you. Ultimately, it isn’t worth it.

My warning is not to look at this, think it is fantastic and use it as the single biggest reason for investing. It’s only a marginal gain, one that you won’t see the benefits of for quite some time.

Don't dive in!

Returning to that analogy I used at the beginning, if you’re up in that plane ready to do your skydive and just need that extra bit of encouragement to take that final leap, listen to that skydiving expert. However, if you’re up there and think, actually this isn’t for me, ignore the gentle encouragement and get your feet firmly back on safe ground until you feel ready to try again at some point.