Updated: Mar 15, 2021
There has been much focus and attention placed on this month’s Budget since it was delivered to workers by the Chancellor Rishi Sunak.
Whilst details around the latest Self-Employment Income Support Scheme (SEISS) were probably of most interest to the taxi industry for obvious reasons, there was also one new tax break which got tongues wagging in the trade; that being the ‘Super Deductions’.
During the Budget on 3 March the Chancellor announced that from 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
a 130% super-deduction capital allowance on qualifying plant and machinery investments
a 50% first-year allowance for qualifying special rate assets.
The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive.
The aim of the super-deduction is to encourage firms to invest in productivity-enhancing plant and machinery assets that will help them grow, and to make those investments now.
With the help of one of the industry’s most established accountants, Short and Sons Ltd, we find out whether Super Deductions will help taxi drivers.
Jason Short, from Short and Sons Ltd, said: “The 'Super Deductions' has been announced in the 2021 budget to encourage spending on new Plant and Machinery. This only applies to items bought after 1 April 2021.
“Short and Sons have had a number of people ask whether this will help London Black Cab drivers as a London Cab is classified as Plant and Machinery. The problem with the Super Deductions is that it is only claimable for Limited companies and nearly all drivers are self-employed. Even if you run your business through an Ltd company or you are a fleet owner, the Super Deduction only allows you to claim 130% of the value of the vehicle in the 1st year of ownership, which would mean a £78,000 write off on a £60,000 cab. If you are lucky enough to have a profit of £78,000 it is an opportunity to be taken advantage of, however, this will remain for the very few.
“Further to this, a strategy most Accountants use for cab drivers is to use enough depreciation to bring the tax down and not to leave the cab significantly undervalued if it were to be sold.”
Short went on to explain the pitfalls of using too much Annual Investment Allowance (AIA). He said: “For example, if you earnt £45,000 after expenses and you bought a cab for £50,000 which qualifies for AIA, it is possible to write off £32,500. This would leave a taxable profit of £12,500, and match the 0% personal allowance leaving the driver with around £450 to pay in national insurance. The problem with this is when the driver wishes to sell the cab later for £40,000. At this point in time, the cab is only worth £17,500 (£50k - £32.5k) in the accounts, and there is tax to pay on that accounting profit - in this example £22,500 of it (£40k - £17.5k).
“This can be compounded by the fact that if you remain earning £45,000 per year, the extra £22,500 book profit will be added to your earnings, and you will be taxed at 40% on everything over the £50k threshold. This is why it is advisable not to be too aggressive with AIA and use someone familiar with the system.”