With an example of the 130% super deduction, we explain what a super deduction is and how dentists can take advantage of this new form of tax saving. We also go on to explain with a further example a surprising result after the super deduction ends for any dental companies with profits between £50,000 and £250,000.
What is a super deduction?
Rishi Sunaak’s budget statement on 3 March 2021was branded by the chancellor the ‘biggest business tax cut in modern British history’. It put in place measures to encourage new investment post-Brexit and Covid with the announcement of a new super deduction for all companies buying new equipment.
When you buy any piece of equipment, current rules allow you to deduct the full cost from your profits before calculating your tax – that is, 100% of the cost is tax-deductible. This is known as the annual investment allowance (AIA). The AIA is currently set to a spending limit of £1 million. Most dentists will fall with the AIA limit each year.
The new super deduction allows companies (sole traders, partnerships and LLPs do not qualify) to deduct 130% of the costs of new equipment as a tax deduction.
When does the super deduction start and finish?
The deduction starts from 1 April 2021 and runs until March 2023.
What can I invest in?
Good for purchases of new equipment
The super deduction is good for new equipment only, not second hand or refurbished. Any brand new dental, practice and IT equipment will qualify. This includes equipment purchased on hire purchase agreements or funded by a loan. Equipment leases do not qualify.
Electric vehicle charging equipment, electric or non-electric vans and bicycles with business use can all be claimed as a super deduction.
Not good for purchasing property
There is no super deduction for practice owners looking to purchase or build a property.
There is no super deduction for property equipment know as the ‘integral features’. These will continue to be claimed at 100% under the annual investment allowance (AIA) for items like:
- solar panels
- thermal insulation
- electrical system (including a lighting system)
- cold water system
- space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
- lift, an escalator or a moving walkway
- external solar shading
Not good for cars or purchases of investments
Petrol, diesel and electric cars are not included in the super deduction or the AIA. However, new electric car purchases continue to have a 100% allowance of their own.
Investment in any intangible assets such’s as licenses, goodwill, shares or pensions do not qualify.
How does the super deduction work in practice?
Example 1 – Darren Dentist Ltd purchasing a new CBCT scanner and claiming a super deduction
Darren is an associate dentist and has decided to invest in a new CBCT scanner costing £40,000.
Provided he makes the purchase and brings the scanner into use after 1 April 2021, he can use the new super deduction.
The super deduction is based on 130% of the £40,000 he spends. He now gets an expenditure deduction of £52,000 (£40,000 x 130%).
The £52,000 deduction qualifies for corporation tax relief at 19%. Darren can now expect to save £9,880 (£52,000 x 19%) on his corporation tax. The after-tax cost of the scanner to Darren is £30,120 (£40,000-£9,880).
Without the super deduction, Darren would have been limited to a deduction of £40,000. He would have saved £7,600 (£40,000 x 19%) on his corporation tax. The after-tax costs to Darren would have been £32,400 (£40,000-£7,600).
Using the super deduction saves Darren £2,280 (£32,400-£30,120) on the cost of his scanner.
What happens after the super deduction finishes and Corporation tax rates rise?
When the super deduction ends on 31 March 2023 there is a planned corporation tax rise. This rise is from 19% to 25% on profits in excess of £250,000.
However, what many people do not realise is that there is a tapering that affects the profits of between £50,000 and £250,0000. The taper means that your profits from £1 to £50,000 are taxed at 19%, and then profits between £50,000 and £250,000 are taxed at 26.5%.
Example 2 – Davina Dentist Ltd purchasing a new CBCT scanner after the super deduction end and Corporation Taxes rise
Davina purchases the CBCT scanner for £40,000 after the super deduction ends in April 2023. She is a profitable dentist and regularly makes a profit (before any new equipment purchases) for corporation tax of £100,000 each year.
She will get a deduction for £40,000 against the company profits. This saves Davina tax of £10,600 (£40,000 x 26.5%) on her next corporation tax return and payment.
By delaying the purchase of the scanner until after the end of the super deduction, the net cost is £29,400 (£40,000-£10,600). Davina saves £720 more than Darren by waiting for the super deduction to finish.
This seems like a very unexpected result – the reason it occurs is because of the increase in corporation tax, and the way in which profits of between £50,000 to £250,000 will be taxed, from April 2023.
The super deduction certainly helps to save tax on any new equipment purchases. Whether it encourages dentists with a company to invest in new additional pieces of equipment or simply make purchases they were intending to make anyway, only time will tell.
Dentists have acess to the AIA and are used to getting 100% tax deductions for most of their equipment purchases. I don’t agree that the extra 30% super deduction justifies the title of ‘biggest business tax cut in modern British history’.
It doesn’t help with the investment into a new property or anyone wanting to acquire the goodwill of any existing practice. It is no help to self-employed dentists.
Remember you do not need to rush to spend before March 2023. When the super deduction ends, the anticipated higher rates of tax relief from April 2023 will more than offset the loss of the super deduction.
As I always say, everyone’s tax affairs are different. This article is prepared as a guide to give an understanding only.
You should always take professional paid advice from an accountant or tax adviser prior to taking any actions after reading this article.