FB: Corporation tax – enhanced capital allowances for computer software
FB: Corporation tax – enhanced capital allowances
FB21 provides the opportunity to claim a 130 percent super-deduction for investments in computer software, including internally developed software.
The super-deduction included in Finance Bill 2021 is designed to stimulate new capital investment into the UK economy, including a 130 percent first year allowance on most new plant and machinery. This relief applies equally to computer software as it does to physical assets, including costs accounted for as intangible fixed assets. This will deliver an absolute benefit of 5.7 percent applying the 19 percent corporate tax rate (i.e. enhanced 30 percent relief x 19 percent) in addition to cash flow benefits by accelerating tax relief. The super-deduction adds to tax reliefs already available on software, including research and development (R&D) tax incentives, and the interaction of these reliefs should be considered to ensure correct and optimised relief is obtained across any software expenditure incurred.
The key criteria for the super-deduction are:
- It is only available for expenditure under contracts entered into from 3 March 2021; and
- The expenditure must be incurred between 1 April 2021 and 31 March 2023.
The expenditure must be capital in nature for tax purposes.
The measure will be most relevant to corporations whose tax profile is such that a super-deduction is beneficial in reducing cash tax payable. In which case, any business incurring intangible fixed asset expenditure on software or IT projects should consider this relief.
- Assess current investment plans to understand what cashflow benefit companies could receive. Equally, consider bringing forward any planned investments to benefit from this two-year super-deduction window;
- Model the tax benefit of the super-deduction alongside the group’s wider tax profile, including the impact of loss carry-forwards, loss carry-backs, higher corporate tax rate and other reliefs available (including R&D reliefs on software);
- Understand and manage the risks relevant to planned expenditure, to ensure that any forecast super-deduction benefits are robust in advance of committing to expenditure or submission of claims; and
- Entitlement reviews – assess the nature of the contractual arrangements on acquiring new assets or the use of those assets to ensure compliance with the super-deduction rules.
- Capturing qualifying expenditure – Companies should ensure that super-deduction claims are optimised by including all relevant allowable ‘software’ costs such as internal salary costs, contractor costs, third party development costs and software/hosting expenditure. Equally, thought should be given to how capable financial systems are of assessing all of the above and creating robust claims;
- Contract commitment dates – Super-deductions are not available for expenditure incurred under contracts entered into before 3 March 2021, so understanding procurement processes is vital. However even where large capital projects have already commenced, dependent on the method of procurement it is possible certain sub-contracts or later phases fall within the rules;
- Expenditure payment terms – Super-deductions are only available on expenditure incurred between 1 April 2021 and 31 March 2023. Plans to accelerate procurement terms to benefit from this window will require consideration of the anti-avoidance rules which prevent relief for contrived arrangements; and
- Balancing charge – on sale of a ‘super-deduction’ asset there may be a balancing charge. With tax rates increasing this charge may be taxed at a higher rate than the deduction.
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