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Note: The super tax deduction scheme ended on 31 March 2023. This article is retained for reference. For current tax relief on compressor purchases, speak to your accountant about the Annual Investment Allowance (AIA) and full expensing, which replaced the super deduction from 1 April 2023.
What Was the Super Tax Deduction?
Under the super tax deduction, for two years from 1 April 2021, any investments a business made in main rate plant and machinery qualified for a 130% capital allowance deduction. Companies could claim back up to 25p for every pound invested in qualifying machinery and equipment.
Introduced by then-Chancellor Rishi Sunak as part of the UK Budget 2021, the scheme was described as a "direct way to help businesses invest" and "drive growth in the economy." It was the most generous tax incentive for business investment offered by a British government at the time.
How It Applied to Compressor Purchases
Compressed air equipment was one area where the tax break was particularly beneficial. Air compressors are essential equipment for many businesses, and the super deduction provided a significant financial incentive to invest in new, more efficient models.
The benefits for businesses investing in compressors included:
- Tax savings: Claiming 130% of the cost of a qualifying investment as a deduction from taxable profits, significantly reducing the tax bill and freeing up cash for other areas of the business
- Energy efficiency: Modern compressors from manufacturers such as CompAir, Hydrovane, and ABAC are designed to be far more energy efficient than older models, reducing ongoing energy costs
- Increased productivity: Newer compressors are more reliable, reducing downtime and increasing output
Eligibility and Qualifying Equipment
The scheme was available to businesses that spent money on qualifying assets between 1 April 2021 and 31 March 2023. The government defined qualifying plant and machinery broadly, covering everything from computer equipment to production lines. For compressed air, qualifying assets included:
- Compressors
- Dryers and gas generators
- Vacuum pumps
- Low pressure equipment
There were exclusions. Structures and buildings did not qualify, nor did equipment installed by landlords. Leased plant and equipment was also subject to restrictions.
Working Examples
Example 1: Single Investment
- A company incurs £1m of qualifying expenditure and claims the super deduction
- Spending £1m on qualifying investments means the company can deduct £1.3m (130% of the initial investment) when computing its taxable profits
- Deducting £1.3m from taxable profits saves the company up to 19% of that amount, or £247,000, on its corporation tax bill
Example 2: Comparing the Old and New Systems
Previous system:
- A company spends £10m on qualifying assets
- Deducts £1m using the AIA in year 1, leaving £9m
- Deducts £1.62m using WDAs at 18%
- Deductions total £2.62m, giving a tax saving of 19% x £2.62m = £497,800
With super tax deduction:
- The same company spends £10m on qualifying assets
- Deducts £13m using the super deduction in year 1
- Receives a tax saving of 19% x £13m = £2.47m
What Replaced the Super Deduction?
From 1 April 2023, the super deduction was replaced by full expensing, which allows companies to deduct 100% of the cost of qualifying main rate plant and machinery in the year of purchase. While less generous than the 130% super deduction, full expensing is a permanent measure and still represents a significant incentive for capital investment in compressors and other equipment.
The Annual Investment Allowance (AIA) also remains available, allowing businesses to claim 100% tax relief on qualifying capital expenditure up to the annual limit.
For advice on purchasing a new compressor and understanding the current tax relief options available, contact Airmech and speak to your accountant about full expensing and the AIA.