In his March 2021 Budget statement, chancellor Rishi Sunak unveiled a super-deduction capital allowance, in a bid to encourage businesses to invest more.
From 1 April 2021 to 31 March 2023, companies will be able to claim a 130% super-deduction capital allowance on qualifying plant and machinery investments and a 50% first-year allowance for qualifying special rate assets.
The super-deduction will allow companies to cut their tax bills by up to 25p for every £1 they invest. The HM Revenue and Customs (HMRC) website recognises computer hardware as machinery, but is it unclear how capital investment in digital assets is treated.
Commenting on the new allowance, Shashi Prashad, private enterprise partner at KPMG, said: “The super-deduction of 130% tax relief on investment in plant and machinery is intended to supercharge business investment and may well do so. By giving it a finite window of two years, the chancellor is incentivising corporate investment sooner, rather than later.”
Portia Pierrel, director at PwC, said: “This will provide not only an accelerated timing benefit, but additional tax relief on expenditure incurred. For example, we anticipate a manufacturer incurring £10m of expenditure on a new factory to receive an additional £1m of cash tax saving over the two-year period the measure is in place.”
But as businesses make use of pay-per-use cloud-based services with recurring subscription fees, questions remain as to how such technology is accounted for, and whether it can be treated as a capital investment.
Julian David, CEO of tech trade organisation TechUK, argued that although the measures put in place by the chancellor will help increase investment across the UK, digital assets and software investments need to be recognised. “We would strongly encourage that these schemes, including the super-deduction, are applicable to the needs of modern businesses that increasingly rely on intangible digital investments in cloud computing, data and artificial intelligence tools to boost growth,” he said.
The HMRC said that IT equipment like computer hardware is within scope of the super-deduction, provided its qualifying conditions are met. For instance the equipment must be new and unused. In subscription-based purchases, HMRC said the super-deduction would apply based on the contractual terms. For example, the allowance is not available for expenditure incurred as a result of a contract entered into on or before 3 March 2021.
Recognising software investments
On its website, the Association of Taxation Technicians has examined whether expenditure on software can be considered revenue or capital in nature. “If a lump sum payment is made for a licence, it will be necessary to consider whether the licence will have a sufficiently enduring nature to be classed as a capital asset,” it said.
“This requires consideration of both the function of the software and how long it will last. HMRC will generally accept that a payment is revenue in nature if the useful life of the software is expected to be less than two years.
“However, it will not accept that software has a limited life solely because new updated versions are released at intervals of less than two years – the question is whether the business actually trades up to the new version at sufficiently short intervals.”
The super-deduction allowance may have repercussion as and when assets are sold.
In an article on the Out-Law website, Eloise Walker, partner and head of corporate tax at Pinsent Masons, the law firm behind Out-Law, warned that the allowance will add considerable complexity when the assets are subsequently sold.
“The policy paper giving details of the new regime even goes as far as to say the measure could ‘negatively impact customer experience’ because of the additional tax admin tasks to be completed when assets are sold,” she said.