Benefit from increased Capital Allowances
In the Chancellor of the Exchequer's recent Budget statement, increased Capital Allowances (CAs) were announced, uplifting rates from the existing 20% to 40% in the first year.
This is a government tax incentive to encourage companies to invest in Plant & Machinery (which includes IT hardware and software), in the current tax year. This means 40% of the value of any IT spend can be offset against profit before tax (assuming liability for Corporation Tax), thus gaining a reduction in Corporation Tax liability, where applicable. In future years the CA benefit is 20% of the reducing balance, i.e. 20% of the remaining unclaimed percentage of asset cost.
Take this worked example, for a £100,000 IT spend:
In Year 1 this would attract 40% CAs. Hence profit before tax is reduced by £40,000 for the tax calculation. This results in a reduction of Corporation Tax (assuming 28% rate) liability of £11,200 for the current tax year. As a comparison, if the investment is delayed until the 2010-2011 tax year, the CA benefit would be halved, i.e. £5,600.