Super-deduction: what it is and the retailers that could benefit

 The super-deduction scheme will come into effect on April 1 and last until the end of March 2023.

Created to incentivise business investment, the programme offers those investing in qualifying new plant and machinery assets a 130% first-year capital allowance.

This means companies will be able to offset the full cost of any new equipment – for example in factories or warehouses, which many retailers are investing in as they build online operations – against tax, plus an additional 30%, if they invest in the next two years.

The list of plant and machinery equipment that could qualify for either deduction includes solar panels, computer equipment, tractors and lorries, refrigeration units and electric vehicle charge points. 

In total this super-deduction will mean that companies can reduce their tax bill by up to 25p for every eligible £1 they invest.

“The incentive is for companies to invest now,” explains Peel Hunt retail analyst John Stevenson.

“Is a retailer going to build a brand new automated warehouse because of this new capital allowance? Probably not, but if they already have those plans then they’re going to be making sure they get that timed for the next couple of years”

John Stevenson, Peel Hunt

“Yes, this is good for retailers, but it has to be [spent] on plants and machinery, not buildings – so its not building warehouses itself, it’s the racking, automation and other things like that that will qualify. Any growth retailer is going to benefit most from this.”

The scheme is expected to stimulate £25bn in business investment, and Sunak said he hopes the scheme will “get companies investing, creating jobs and driving our economic recovery”. 

“Anyone that is investing for growth over the next few years is going to be trying to make sure they get the most out of this opportunity,” adds Stevenson.

“Is a retailer going to build a brand new automated warehouse because of this new capital allowance? Probably not, but if they already have those plans then they’re going to be making sure they get that timed for the next couple of years.”

Shore Capital analyst Greg Lawless agrees those with investment plans in the works would be likely to “pull forward some projects”.

So which retailers are among those that may stand to benefit most?

Amazon

As one of the biggest online retailers in the world, Amazon has benefited exponentially from the online shift during the pandemic, raking in sales of £19.4bn last year, up 51%.

The retail titan confirmed plans to open a “mega box” warehouse near the Dartford tunnel later this year, costing £200m to build.

The 2.3 million sq ft complex is planned to be carbon net zero, powered by the largest solar photovoltaic scheme of any new development in the UK, which could also make the retailer qualify for the deduction scheme.

Amazon has been steadily investing in the UK throughout the past decade, pumping £23bn into building fulfillment centres and offices since 2010, so the deduction will likely be an added bonus to plans already in the works.

However, the possibility of a super-deduction has caused controversy in Amazon’s case, because the retailer is already slated by some for paying too little tax in the UK.

In 2019, Amazon paid taxes of £293m, just 2.1% of the £13.73bn it made in sales – for comparison Tesco paid 4.9% in the same year. 

The deduction could essentially wipe out Amazon’s tax bill in the UK, creating what some could see as an unfair advantage against those that have struggled in the pandemic and do not have the available capital expenditure to take advantage of Sunak’s scheme.

Next

Stevenson points out that Next has been ploughing funds into its warehousing capacity over the past few years and 2020 was no exception. 

In its half-year results, Next said warehousing would be its biggest expenditure this year, allotting £78m as part of a long-term plan to increase capacity.

Over the next five years, Next expects to spend £370m on warehouse expansion in a bid to build up capacity by 80% versus the year to the end of January 2020.

As part of its programme, Next submitted a planning application for a new boxed warehouse last summer, which the retailer said was to be “highly automated” and would likely qualify for the super-deduction.

Work on the warehouse is due to start this year and be completed by 2023, making the timing perfect for Next to take advantage.

Asos

Asos announced plans earlier this year to build a new £90m fulfilment centre in Lichfield.

The 437,000 sq ft facility is expected to be up and running within the next 12 months and to reach peak trading capacity by 2023.

The fashion etailer has recorded strong sales growth throughout the pandemic, up 23% to £1.33bn in the four months to December 31.

The recent acquisition of Arcadia’s Topshop, Topman, Miss Selfridge and HIIT brands means Asos needs the extra space and capacity.

Asos boss Nick Beighton said he welcomed the “new and continuing support for businesses to help fuel the country’s economic recovery”.

He added: “We believe it’s only right that successful, profitable businesses make an additional contribution without stifling growth, investment and innovation. 

“As a UK-based and tax domiciled business, Asos will meet in full our contribution to the future increase in corporation tax, as well as investing £90m and creating 2,000 new jobs at our state-of-the-art fulfilment centre in the Midlands.”

Ocado

Ocado has been investing in opening smaller versions of its automated warehouses in order to reach a greater number of customers.

The pureplay grocer is set to open a new mini fulfilment centre in Bristol by the end of this month and has laid out plans to set up at least a dozen more to service its Ocado Zoom one-hour delivery proposition.

Ocado has also expressed its desire to expand its reach to more customers in the north of England and beyond the Scottish border, Ocado Retail boss Mel Smith has said it is “a matter of when not if”.

With plenty of plans in the works and known for its technological prowess, Ocado looks well placed to take advantage of the super-deduction. 

Marks & Spencer

M&S could be a potential beneficiary of the super-deduction, because the retailer has flagged “expanding and investing in” its Castle Donington online warehouse.

One banker said he hoped the deduction “might give a leg up to retailers who’ve fallen behind”.

“Using the super-deduction in addition to being able to offset your losses over the two-year carry-back date – on top of all the other stimulus packages such as business rates relief and the job retention scheme – will hopefully mean there’s never been a better time to invest and get a tax benefit for doing so.

“I’d think most mid-market clothing and apparel retailers [would benefit] to be fair,” he added.

M&S fits this description, with its floundering clothing arm in need of a boost, while its pandemic results suffered.

“Using the super-deduction in addition to being able to offset your losses over the two-year carry-back date – on top of all the other stimulus packages such as business rates relief and the job retention scheme – will hopefully mean there’s never been a better time to invest and get a tax benefit for doing so”

A banker

The bellwether retailer recorded a 7.6% drop in like-for-like sales in the 13 weeks to December 26, but has begun a transformation programme in a bid to turn things around. Part of that is to build the MS2 digital and data division, which operates like a pureplay. 

In its first half, M&S’ online clothing and home sales rose 34% and it increased market share.

With online growth as a priority, M&S could use the super-deduction as part of its plans.