By Phil Baker, Head of Commercial at cloud services provider, Synapse360

In an increasingly digital world, it is vital that businesses are able to adapt to changing requirements in order to remain competitive.

For many businesses, COVID-19 has accelerated their digital transformation. However, legacy IT systems are still holding many back and preventing them from reaping the benefits.

This is because their ageing IT systems are more likely to fail, require more maintenance work, take longer to update, and pose greater security risks. They simply were not designed to cope with the demands of a world this connected.

Business benefits

Investing in IT improves business agility, delivers greater efficiency, provides enhanced security, and can also boost employee morale. Enabling teams to work smarter and provide customers with a more seamless experience are therefore top priorities for many businesses.

It’s perhaps unsurprising, then, that investment in technology is on the increase. According to Gartner, worldwide IT investment is projected to hit $4.1 trillion in 2021, an increase of 8.4% from 2020. Cloud is certainly one of the biggest digital transformation drivers and the adoption of cloud infrastructure and applications to facilitate things like video collaboration, a necessity since the beginning of the pandemic.

Cost considerations

For any business, making investments requires careful consideration, particularly in the current economic climate. When it comes to IT infrastructure, purchasing decisions may be made by those who don’t necessarily have an IT remit or understand the potentially massive opportunities that digitally transforming their business could provide.

The cost of investing in IT infrastructure can also be a deterrent for some businesses; however, there is a new incentive introduced this year as part of the suite of economic recovery measures set out in the most recent budget by the Chancellor of the Exchequer, Rishi Sunak. The introduction of this time-limited inducement may persuade you to overhaul your digital ecosystem with a reduced impact to your budget.

The solution: Super-deduction

To encourage businesses to invest and stimulate economic recovery, the UK Government recently announced a super-deduction tax break. It means businesses could claim 130% of what they spend on equipment for their business against taxable profits.

IT infrastructure qualifies for the super-deduction tax relief meaning the incentive enables businesses to accelerate or bring forward their digital transformation plans.

How does it work?

The super-deduction tax relief means that companies investing in qualifying new plant and machinery assets between 1st April 2021 and 31st March 2023 can claim a temporarily boosted 130% first-year allowance for main rate assets (ordinarily 18% tax relief), and a 50% first-year allowance for special rate assets (ordinarily 6% annual relief).

Every business, regardless of size, could benefit from minimum additional savings of around 25p per £1 of investment, dependent on tax status. For larger businesses planning to exceed the current Annual Investment Allowance of £1m, the incremental savings could be far greater.

Because the scheme applies to technology investments such as IT infrastructure, now is a good time for businesses to ensure they understand the incentive and prepare investment plans while it is available.

What type of investments qualify?

Main rate assets such as machinery, plant, and IT infrastructure qualify for 130% first-year allowance, while special rate assets such as land, buildings, cars and other integral features qualify for 50% first-year allowance.

How does this relate to IT infrastructure investment?

In terms of IT infrastructure, spend on hardware, servers, and software can all qualify for the main rate tax relief.

For businesses that might have planned to invest in IT pre-Covid but put their plans on-hold, super-deduction is a compelling incentive to revisit those plans and take action.

Others may have found that their employees struggled to work from home, or that their financial systems haven’t been able to support the ‘new normal’. Making decisions to invest in technology and take advantage of digital transformation now makes good business sense.

Things to consider

There are five steps that businesses should follow when considering how super-deduction can work for them:

1. Review current investment plans and understand the potential cashflow benefits for each proposed investment.
2. Consider fast-tracking planned investment to benefit from the two-year window for which the super-deduction is applicable.
3. Circle back on plans and projects that may have been cancelled or postponed as a result of the pandemic.
4. Consider whether their current investment plans are suitable and futureproof for a high-performing, efficient post-pandemic business.
5. Model the tax benefit alongside the business’ wider tax profile. Engaging a respected accountant or tax advisor is likely to deliver a strong ROI where material investment is planned.

How to benefit  

Again, businesses should take the following steps to make sure they derive the full benefit of super-deduction:

1. Ensure new assets and associated contractual arrangements comply with the super-deduction rules.
2. Be careful not to fall foul of anti-avoidance rules, which prevent relief for artificial arrangements.
3. Maximise legitimate claims – don’t forget to include all allowable associated costs.
4. Even where large projects have already started before 3^rd March 2021, certain sub-contracts or later phases of work may fall within the rules. Check in-flight projects and discuss with a tax advisor where necessary.
5. Make sure financial systems and processes are capable of assessing all of these points. Businesses need cast-iron assurances and confidence that relief claims are robust enough to endure any challenge from HMRC.

Summary

Here are some key take-aways:

• The super-deduction comes into effect from 1st April 2021 and lasts until 31st March 2023, for expenditure on all contracts entered into from 3^rd March 2021.
• The super-deduction offers a temporarily boosted 130% first-year allowance for main rate assets (ordinarily 18% annual relief), and a 50% first-year allowance for special rate assets (ordinarily 6% annual relief).
• Most IT Infrastructure spend would be expected to qualify for the main rate of capital allowances.
• There is no upper limit applied to the level of expenditure that benefits from the relief.

A business’ success or failure now depends on its ability to adopt new digital solutions and become more agile. Taking advantage of the super-deduction tax relief while it is available could be just the boost your business needs.

Businesses should seek expert guidance about the commercial considerations behind super-deduction tax break to ensure they’re in a strong position to embrace digital transformation and benefit whilst the measure is in place.

For further information visit https://www.synapse360.com/

For more details about the super-deduction, visit the UK Government website:

https://www.gov.uk/government/publications/new-temporary-tax-reliefs-on-qualifying-capital-asset-investments-from-1-april-2021/new-temporary-tax-reliefs-on-qualifying-capital-asset-investments-from-1-april-2021