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Capital allowances are a widely used form of tax deduction in UK business. Yet manufacturers may be leaving millions of pounds unclaimed on digital transformation projects simply by not being aware of some of the nuances in the rules.
How so? Well, it is certainly true that few, if any, manufacturers would fail to claim capital allowances on big-ticket purchases such as new manufacturing plant or machinery.
When it comes to digital transformation projects, such expenditures can include IT platforms and robotics. But there remain several lesser-known types of capital allowance that can help you claw back serious amounts of cash on your next digital transformation project.
1. Integral features
Expenditure on fixtures such as server room ventilation, air conditioning and so on can be eligible for capital allowance write-downs of 6% a year. That’s less than the 18% a year given for robots, automated machinery or other plant, but still not to be sniffed at.
Furthermore, some recent expenditure on specific integral features could have been covered by the Enhanced Capital Allowances (ECA) scheme, which are abolished from April 2020.
The ECA aimed to encourage businesses to install energy-efficient technologies such as heat pumps and air-to-air energy recovery systems. It allowed you write down 100% of the cost in the first year rather than spreading the benefit over several years.
Needless to say, this can be highly valuable from a cashflow point of view.
2. Annual Investment Allowance
Under the Annual Investment Allowance (AIA) scheme, 100% of expenditure on eligible plant and machinery can be claimed as a tax deduction, up to a set amount.
This includes a broad range of expenditures, including automated machinery as well as integral features and fixtures within a building. In practice, this means that in a new data centre you may be able to claim much more than just the servers within it.
Lifts, electrical systems, cooling, air supply and return plenums, backup generators, uninterruptible power supply systems and much more could be covered by the AIA.
The total AIA (per company group) varies from time to time and is currently set at £1m, its highest level ever. But this limit is only available to the end of 2020, at which point it will reduce to £200,000.
Thus, it may be worth bringing forward any planned capital investment programmes to maximise your entitlement to the AIA.
3. Research and Development Allowances
Do you have premises in which you undertake activities that qualify for research and development (R&D) and for which you may be obtaining relief for the revenue costs of the work under the R&D expenditure credit?
If so, then you may also be able to claim a proportion of the capital costs associated with providing plant, equipment and buildings linked to that R&D work. This is a 100% first-year allowance.
The great advantage of the Research and Development Allowance is that it can be claimed against otherwise non-qualifying elements, such as building structures, and is not just claimable against the plant and machinery within the building.
4. Structures and Buildings Allowance
From October 2018, businesses have also been able to claim back the cost of investments under a new allowance called the Structures and Buildings Allowance (SBA), which covers expenditure on new-built or renovated non-residential structures and buildings.
The SBA offers a straight-line 2% capital allowance over 50 years. This isn’t great in comparison to other schemes, but it does allow you to claw back cash that you might not be able to reclaim any other way.
In fact, it is important to bear in mind that the Integral Features, ECA, AIA and SBA all have plenty of small print that you need to navigate in order to get the full benefit.
And that’s not all: if you are claiming under different schemes and want to maximise your benefit then it pays to know which items you should claim against each type of allowance.
The easiest way to find out how much extra you could claim is to get a professional to carry out a quick audit of your project. There could be millions out there just waiting to be claimed.
For advice on how to improve your capital allowances position, contact Joe Newton at [email protected]