This brief article provides my view of how the UK governments new 130% super-deduction announced on 3 March 2021 could benefit businesses investing in technologies.
What is the ‘super-deduction’?
It provides a benefit to companies investing in assets, in this case plant and machinery categories which include software and technology. The benefit comes in the form of a reduction in a company’s tax bill of 24.7p for every £1 invested, effectively offering (just under) a 25% discount on a qualifying investment in that tax year.
How does it work?
For a software investment to be eligible for the super-deduction it must result in the creation of an asset. An investment in custom software projects that build a company a solution that results in the company owning the IP is deemed an asset and therefore eligible. Paying a monthly fee to access and use a SaaS product is not an asset and therefore not eligible.
Is this new?
Yes and no. Technology investments have been subject to an Annual Investment Allowance (AIA) which enables a company to offset their tax by a proportion of a software investment annually. The new super-deduction is a better form of this allowance, providing a lump sum discount on the investment within the tax year that it was made, this is unlike the AIA which sees a gradual recoupment of part of the investment over a 5.5 year period. (Note that the super deduction is a considerably larger discount than the AIA).
When does this come into effect?
For expenditure incurred from April 2021 until the end of March 2023, companies will be able to claim their discount during the annual filing process for corporation taxes.
How does the calculation work?
The calculation looks like this: For a company that invests £250,000 in qualifying software in the 2021or 2022 tax year and has a £500,000 corporation tax bill:
- £250,000 X 130% = £325,000
- £500,000@19%= £95,000 (original tax bill)
- £500,000 less £325,000 = £175,000@19%=£33,250(new tax bill)
- Saving in tax as a result of investment=£61,750 i.e. 25% of the £250,000 investment.
Standard writing down allowance:
The standard writing down allowance of 18% on the asset value for 5.55 years. i.e. £250,000X0.18=£45,000 @ 19% = £8,550. £8,550 for 5.55 years = £47,500 (but crucially you have to wait 5 years for all this money to come through)
Why is the government introducing the super-deduction?
The government has been worried about the gap in productivity of the UK economy compared to western world countries for some time now. COVID-19 has not made the situation any better. By incentivising organisations to invest money in capital that increases productivity it hopes to provide stimulus to the UK economy as it recovers from the COVID-19 pandemic
What technology assets are Software Solved being asked about in relation to the super-deduction?
We are seeing investment in custom software solutions falling into three broad categories.
1. Investments that automate efficiencies – Investments that result in a real cash saving by eliminating cost and inefficiency from a process that would otherwise become more inefficient as growing demand is placed upon it. The cash saving manifests itself in the form of reduced head count and/or a constant head count as the systems volume grows
2. Digitisation of reach to customers – CIO’s were forced to implement digitisation solutions at urgency when the outbreak of COVID-19 hit. Those solutions are now being replaced by more strategic, efficient and permanent solutions that can perform at scale reliably for customers. Customer portals, omni channels, investment and insurance products are common in this category.
3. Legacy replacement – There is still strong demand for the replacement of legacy systems to improve the offering to the customer in order that an organisation can keep pace with the competitions offering in the market.
How will this apply to me?
You need to be an incorporated company to be able to take advantage of the super-deduction. The tax treatment/benefit may vary depending on your individual company’s tax circumstances.
What to do if you would like to find out if your prospective software investment qualifies for the super-deduction?
Get in touch with us and we’ll be more than happy to talk to you about your potential software investment and provide you with an understanding of whether it is eligible for the super-deduction.
Call us on: 01392 453 344 or get in touch via our website at www.softwaresolved.com
How to find out more about the super-deduction in the public domain?
The above article is based on our understanding of the super-deduction initiative but we do recommend that you discuss your company eligibility with a financial expert.
The government have provided a helpful fact sheet here: https://www.gov.uk/guidance/super-deduction