What counts as ‘qualifying expenditure’?
HMRC set out detailed guidelines on what can be classed as qualifying expenditure.
The general rule is that qualifying expenditure is:
- Expenditure on the provision of plant or machinery for the purposes of an activity that the business performs, and
- The business incurring the expenditure owns the plant or machinery as a result of incurring the expenditure
We then have to ask what counts as ‘plant or machinery’. Well when it comes to IT and Software, the good news is most items do qualify. Physical IT hardware such as computers and servers are recognised as plant and machinery by HMRC. Software such as accounting software and EPOS software also qualify under the guidance. In addition, the costs associated with bringing the IT or software investment into operation can also be included such as the professional service costs of an engineer or consultant.
There are some costs associated with an IT or software project that may not qualify such as on-going support fees or software subscriptions. Whilst it is best to check these sort of items with your accountant, in most cases that the vast majority of spend on an IT or software project will qualify.
How does it work and how much is it worth?
Spend on plant and machinery, often referred to as ‘capital’ or ‘fixed asset’ spend in business, does not reduce profits in the year purchased as they are held on a company’s balance sheet. The cost of assets are slowly released as a charge through depreciation each year, reducing a company’s profits. However, depreciation is not an allowable tax deduction so has to be added back when calculating taxable profits.
Fortunately, businesses have access to the Annual Investment Allowance that allows spend on qualifying expenditure of up to £1,000,000 to be deducted from that year’s taxable profits. This allowance therefore reducing their tax bills by the applicable corporation tax rate (currently 19%). The ‘super deduction’ will enhance this benefit further by increasing by the amount to be deducted by an additional 30%. See the illustration below to see how this will benefit businesses in real terms.
|Original Annual Investment Scheme||Super Deduction Scheme|
|Super Deduction Applied @ 130%||130,000.00|
|Tax Deductible Saving 19%||19,000.00||24,700.00|
|% Saved In Tax||19%||25%|
Under the old rules, after spending £100,000 on qualifying assets the business had been able to deduct this amount off their taxable profits, reducing their corporation tax bill by £19,000. However, using the ‘super deduction’ that £100,000 of spend is enhanced on the tax computation to reduce the taxable profits by £130,000 instead. The additional £30,000 deduction increases the tax saving by £5,700 to a total of £24,700.
With the ‘super deduction’ in place, the business is now saving tax at a rate of 25%. For every £1 spent on qualifying assets, 25p is returned in saved tax.