The rules surrounding capital allowances changed again this April following the closure of the super-deduction scheme. Understanding the difference between the allowances on offer is key to maximising tax savings and improving cash flow. Early in the life of a tech company, this is important as capital investment may be significant.
What purchases qualify for capital allowances?
Broadly, a business can claim capital allowances on plant (equipment, machinery, vehicles) that are used in the business and that will have an estimated lifespan of at least one year.
Expenditure is generally distinguished between the two rates, main rate and special rate. Main rate expenditure includes e.g. computer equipment, office furniture. Special rate include integral features such as expenditure on electrical and heating systems. Different types of capital allowances will offer different rates of tax deductions based on whether an asset is main rate or special rate.
What kind of capital allowances are available?
The super-deduction, full expensing and first year allowances
The temporary super-deduction scheme allowing up to 130% tax relief on qualifying capital expenditure has now come to an end. It was first introduced at the start of the COVID-19 pandemic. To keep the UK attractive to business owners and to encourage further investment in the UK, the government has introduced ‘full expensing’ from April 2023.
Under full expensing, companies can claim a 50% or 100% immediate tax deduction for special rate and main rate purchases respectively in the year of purchase on new qualifying expenditure. Like the super-deduction, full expensing is a type of first year allowance. This means where an asset is subsequently sold, any proceeds received will be charged to tax.
Full expensing is a welcome introduction for companies with significant capital expenditure. However, there are notable exclusions, including cars, gifts, and assets subsequently leased to another party. If the investment is not significant, it may be unlikely that a company will require full expensing as the Annual Investment Allowance continues to be a generous allowance for smaller businesses.
100% first year allowances continue to be available for electric cars with zero CO2 emissions.
The Annual Investment Allowance (AIA) and writing down allowances (WDA)
The government has set the Annual Investment Allowance (AIA) at £1m indefinitely, which is good news. While the AIA is not available on cars, it can be used on second-hand items, which are not eligible for full expensing. It is worth remembering that companies in a group or under common control are collectively entitled to one AIA.
For other expenditure, e.g. on cars or second-hand assets after AIA has been fully utilised, writing down allowances (WDA) are available at 18% per annum for main rate assets and 6% per annum for special rate assets.
If you find your company in a position where investment on capital assets exceeds £1m and is a mixture of main rate, special rate, brand new and second-hand purchases, then utilising the AIA against the special rate and/or second-hand purchases is key to maximising your tax savings. However, it will depend on each company’s individual circumstances.
What capital allowances are available for intangible items?
Tech-focused companies will likely spend significant amounts of time and money on software, research and development, and creating intellectual property. The corporate intangible assets regime applies to qualifying intangible assets such as patents, copyrights, and software costs. Generally, the tax treatment will follow the accounting treatment, meaning a company can deduct the amortisation from taxable profits. I.e. the tax deduction is spread over the expected lifespan of the asset.
When purchasing software, it will be necessary to consider whether the purchase is in part or wholly revenue expenditure. For example, recurring licence costs will most likely be revenue in nature rather than a capital asset. If a single payment is made on computer hardware and a software licence, it may be that the cost will need to be apportioned between both capital and revenue expenditure.
Internally developed software will usually fall under the intangible regime. Where software is capitalised as an intangible asset, an election can be made in the company tax return to treat the item as eligible for capital allowances. This means full capital allowances are available instead of amortisation. This has the effect of speeding up the tax deduction so that it can help short-term cash flow. However, watch out for changing tax rates; if the corporation tax rate is increasing in future, then amortisation deductions under the intangible regime may offer a higher tax saving overall, and vice versa if the corporation tax rate decreases.
Website development costs will usually be a combination of revenue and capital expenditure. Research, planning, and ongoing maintenance of websites are generally accepted as revenue expenditure. Where a website will help to directly generate revenue for your company, costs incurred on design and the content development of the website can be treated as capital expenditure and therefore, capital allowances are available.
A brief note on crypto
The purchase of crypto assets will not qualify for capital allowances. Very generally, investments and disposals of crypto assets will usually be subject to corporate capital gains tax rules for companies. However, transactions in crypto mining, for example, may constitute a trade, in which case assets purchased for use in that trade may qualify for capital allowances. Tax on crypto is an evolving area, so advice should always be sought.
Other claims your company can make
Research and Development (R&D) tax relief is still available under the SME and the Research and Development Expenditure Credit (RDEC) schemes for qualifying innovative projects in science and technology. The government has recently introduced new requirements when making claims. It is currently consulting on merging the two schemes into a single R&D regime with a view to decreasing R&D tax fraud. As a result, an increasing number of HMRC checks and enquiries are being made into corporation tax returns with accompanying R&D claims, so engaging a professional adviser is recommended.
Alongside an R&D claim, the Research and Development Allowance (RDA) is available for capital expenditure on assets that are used to carry out qualifying R&D activities. RDA is another kind of first year allowance which offers a 100% deduction on qualifying expenditures, which can include facilities such as buildings, which ordinarily would not qualify for capital allowances.
The Patent Box is available for companies who own or have exclusively licenced patents and have undertaken qualifying development on the patents. This scheme rewards investment in intellectual property by allowing companies to apply a lower rate of corporation tax to profits earned from the patented inventions.
This list is not exhaustive, but it is also worth mentioning the Structures and Building Allowance (SBA), which is currently available at a flat rate of 3% per annum. This allowance may be relevant if, for example, you are moving into a new office space. It cannot be claimed on residential property or for any items which already qualify for capital allowances. It can offer an extra tax saving where you have spent money on constructing or refurbing commercial property. A full capital allowances review is always recommended if you have incurred significant fit-out or refurb costs.
The complexities of tax regulations and the evolving allowances can be challenging to navigate without professional guidance. With the variety of incentives on offer, seeking tailored professional advice is key to ensuring you are maximising the available capital allowances for your company and protecting your bottom line.
For specialist tax advice relating to your capital investments, please get in touch with Georgia Gibson-Smith from the Menzies Technology Sector Team.
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