As we slowly emerge from lockdown, the UK government is encouraging businesses to invest and stimulate economic recovery with its recently announced super-deduction tax break. It means businesses could claim 130 per cent of what they spend on equipment for their business against taxable profits.
Taking advantage of the scheme could accelerate a business’ digital transformation because IT infrastructure qualifies for the super-deduction tax relief. This could enable or entice businesses to bring forward transformation projects and other productivity enhancing initiatives which may have been planned for the future, or efficiency initiatives which haven’t been planned at all until now.
Business leaders should therefore fully understand these measures and prepare investment plans to benefit whilst they are available.
What is super-deduction tax?
The super-deduction means that companies investing in qualifying new plant and machinery assets between April 1 2021 and March 31 2023 can claim a temporarily boosted 130 per cent first-year allowance for main rate assets (ordinarily 18 per tax relief), and a 50 per cent first-year allowance for special rate assets (ordinarily 6 per cent annual relief). This even applies to technology investments such as IT infrastructure.
Every business, regardless of size, could benefit from a minimum of additional savings of around 25p per £1 of investment, dependent on tax status. For larger business planning to exceed the current Annual Investment Allowance of £1m, the incremental savings could be far greater.
Why is it being introduced?
Since Covid-19, previously low levels of business investment have fallen further, with a reduction of 11.6 per cent between Q3 2019 and Q3 2020.
Much of the UK’s productivity gap with its competitors is attributable to its historically low levels of business investment compared to its peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.
Making capital allowances more generous works to stimulate business investment. As a result, these measures can promote economic growth.
What kind of investments qualify?
Main rate assets such as machinery, plant and IT infrastructure qualify for 130 per cent first-year allowance, while special rate assets such as land, buildings, cars and other integral features qualify for 50 per cent first-year allowance.
How does this relate to IT infrastructure investment?
Investment in IT infrastructure qualifies for super-deduction tax relief, which could enable businesses to bring forward their digital transformation or any other productivity enhancing initiatives that may have been planned for the future.
Within IT infrastructure, spend on hardware, servers and software can all qualify for the main rate tax relief.
For businesses that might have planned to invest in IT pre-Covid but put their plans on-hold due to economic uncertainty, super-tax deduction is a powerful incentive to get those plans back on track.
Others may have found that their employees struggled to work from home or that their financial systems haven’t been able to support the ‘new normal’. Making decisions to invest in technology and take advantage of digital transformation now makes good business sense.
Who is eligible?
The scheme is applicable to businesses of all sizes – as long it provides tax returns, it is eligible.
How should businesses react?
There are five steps that businesses should follow when considering how super-deduction can work for them:
- Review current investment plans and understand the potential cash flow benefits for each proposed investment
- Consider fast-tracking planned investment to benefit from the two-year window for which the super-deduction is applicable
- Circle back on plans and projects that may have been cancelled or postponed as a result of the pandemic
- Consider whether their current investment plans are suitable and futureproof for a high-performing, efficient post-pandemic business.
- Model the tax benefit alongside the business’ wider tax profile. Engaging a respected accountant or tax advisor is likely to deliver a strong ROI where material investment is planned
How should businesses manage their risks and safeguard their claims to ensure all allowed associated costs are covered?
Again, businesses should take the following steps to make sure they derive full benefit:
- Ensure new assets and associated contractual arrangements comply with the super-deduction rules
- Be careful not to fall foul of anti-avoidance rules, which prevent relief for artificial arrangements
- Maximise legitimate claims – don’t forget to include all allowable associated costs
- Even where large projects have already started before March 3 2021, certain sub-contracts or later phases of work may fall within the rules. Check in-flight projects and discuss with a tax advisor where necessary
- Make sure financial systems and processes are capable of assessing all of these points. Businesses need cast-iron assurances and confidence that relief claims are robust enough to endure any challenge from HMRC
An illustrative example
Before the introduction of the super tax deduction, using the Annual Investment Allowance of up to £1m, a SME business spending £100,000 on qualifying assets would deduct that £100,000 spend from its taxable profits, for a tax saving of £100,000 * 19 per cent (current rate of UK corporation tax), equating to a £19,000 saving.
Under the super-deduction tax, that spend would be applied at a rate of 130 per cent against taxable profits, for a tax saving of £130,000 * 19 per cent, or £24,700 – £5,700 more than under the previous regime (a 30 per cent boost).
Previously, companies could make use of the Annual Investment Allowance, which is limited up to £1m. This meant that any capital spend up to £1m could be deducted in full from taxable profits. Beyond that level of spend, capital allowances kicked in; and it is these allowances which have been amended to create the super-deduction tax relief, offering a 30 per cent additional benefit over and above the Annual Investment Allowance.
The biggest winners in terms of total savings will therefore be those who would plan to spend over and above the £1m Annual Investment Allowance. As the super-deductions tax is not capped, there is the opportunity for far higher tax savings where these previously would have been limited by the Annual Investment Allowance.
- The super-deduction comes into effect from April 1 2021 and lasts until March 31 2023, for expenditure on all contracts entered into from March 3 2021.
- The super-deduction offers a temporarily boosted 130 per cent first-year allowance for main rate assets (ordinarily 18 per cent annual relief), and a 50 per cent first-year allowance for special rate assets (ordinarily 6 per cent annual relief).
- Most IT Infrastructure spend would be expected to qualify for the main rate of capital allowances.
- There is no upper limit applied to the level of expenditure that benefits from the relief.
Ultimately, business should seek expert guidance about the commercial considerations behind super-tax deduction, to ensure they’re in a strong position to embrace digital transformation and benefit from the relief.
For more details about the super-deduction, visit the UK Government website:
Phil Baker is the head of commercial at cloud services provider, Synapse360