When businesses consider upgrading their IT infrastructure, the high cost of quality hardware can often be a limiting factor.
However, by utilising capital allowances, organisations can significantly reduce these costs.
What Are Capital Allowances?
Capital Allowances allow organisations to write off the cost of select assets against their taxable income. Businesses deduct capital allowances when calculating their taxable profits as a way of deducting depreciation.
There are two main types of capital allowances – Structures and Buildings Allowances (covering construction and renovation of buildings) and Writing Down Allowances (for plant and machinery).
IT hardware, including servers, computers, and networking equipment, typically qualifies for these allowances, making it a great financial tool for companies looking to enhance their technological capabilities while managing expenses.
The Power Of ‘Full Expensing’
In 2023, full expensing was introduced for qualifying capital investments as a driver for business investment.
Under this scheme, businesses subject to UK corporation tax can claim 100% of the cost of eligible hardware in the year the expenditure occurs. This offers an immediate tax deduction, effectively lowering the company’s taxable income and, subsequently, its tax liability.
PwC gives this practical example “Where a company incurs capital expenditure on assets that would otherwise qualify for the main pool (such as most loose plant and machinery, furnishings, manufacturing equipment, IT equipment and capital investment on software) it is entitled to claim a first year allowance and take a 100% in year deduction in respect of the expenditure.
So, for example, where a business would otherwise have a £1m tax liability, if they were to incur £2m of qualifying expenditure on a new production line then, by claiming the full expensing first year allowance, they would reduce their tax liability by £500k.”
IT Hardware Strategies For Full Expensing
The ability to fully expense IT hardware in the purchase year can be a game changer, especially for businesses aiming to maintain liquidity while investing in essential technology.
Full expensing makes it easier for companies to upgrade outdated systems or acquire new hardware to meet growing operational demands without the financial burden of high upfront costs. By reducing the tax impact, businesses can reinvest those savings into other critical areas or further technological enhancements, making it a win-win scenario.
Higher Specs
One of the other significant advantages of capital allowances is that they give businesses the financial freedom to invest in higher-spec IT hardware. Many companies hesitate to invest in top-of-the-line technology due to cost concerns. But with the ability to claim back the full value of the hardware through capital allowances, these investments become far more feasible.
Higher-spec hardware will offer better performance, improved security, and longer lifespans, ultimately providing a better return on investment over time. Whether it’s upgrading to the latest servers with enhanced processing power, the tax savings generated through capital allowances can allow businesses to access the very best technology on the market without over-stretching budgets.
Getting Strategic
Strategic planning around capital allowances can make all the difference in maximising savings. For instance, timing IT hardware purchases to align with your financial year-end or spreading investments across years can optimise the tax benefits you receive. Businesses should work closely with their accountants or tax advisors to develop an IT investment plan that maximises their capital allowance claims.
Maximising Tax Relief For IT Hardware
By understanding and strategically utilising capital allowances, businesses can not only cut costs but also future-proof their IT infrastructure, positioning themselves for success in an increasingly digital world.
Organisations should make their own enquiries with their accountants or financial advisors before planning to utilise Capital Allowances.
Once accomplished, Akita can assist organisations with IT hardware procurement, including finding hardware at various price points. We can also assist organisations with rolling IT hardware replacement, working to any financial schedules you may have for replacement.
To discuss IT hardware procurement and replacement please get in touch:
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