Computer upgrades and Capital Allowances
Synopsis: 8th April 2014 marks the end of Microsoft support for Windows XP. For many companies this will involve a large capital outlay for new computers, servers and software. With this in mind we take a look at the tax position of purchasing new computer systems.
As we all know the 6th of April has always been a big date in the diary for the industry. However, next year the 8th of April may be just as important.
On the 8th of April 2014 Microsoft will no longer be giving technical assistance and support to Windows XP and Windows Office 2003. This includes ending the automatic updates that help protect PCs – which means an increased possibility for computers to become more vulnerable to security risks and viruses.
For many businesses who already use Windows 7, Windows 8, or other operating systems, this isn’t an issue. However, figures published by Net Applications in October 2013 estimate that around 31% of computers are still running Windows XP.
In addition, Microsoft will be ending its support for Windows Server 2003 (one of the most popular small business server operating systems) on 15 July 2015.
Those affected by these dates are therefore looking at large capital outlays in the near future. Not only will there be the significant cost of the new software itself, but the need to update Windows XP, Office 2003 (and later Windows Server 2003) with newer software is also likely to require a capital outlay to purchase more modern PCs and servers to run them on.
So now is a perfect time to remind ourselves of how such outlays will be treated for business tax purposes.
Any capital expenditure incurred on the provision of computers or software that is used wholly or partly for the purposes of business will usually be eligible for capital allowances provided the computers and/or software have an expected lifespan of more than two years.
If the computers or software are used for non-business use, capital allowances can still be claimed in respect of business use, but the allowance will be reduced by the amount of time spent on non-business use.
Annual Investment Allowance on computer hardware and software
Most businesses can claim an annual investment allowance (AIA) for expenditure on computers and computer software. This, in effect, is an accelerated capital allowance giving 100% relief for qualifying capital expenditure incurred by most small and medium sized enterprises – mainly sole traders, partnerships and companies.
Legislation was introduced in Finance Bill 2013 increasing the AIA from £25,000 to £250,000 from 1st January 2013 for all businesses for a temporary period of two years. A business with a calendar year chargeable period will therefore be entitled to a maximum AIA of £250,000 for each of its 2013 and 2014 chargeable periods.
So, for example, Bloggs and Co has an accounting period of 1st January to 31 December. If the company is required to spend £400,000 on replacing computers, software and servers for its company before the April 2014 deadline, then it could purchase £250,000 worth in the period 1st January 2013 to 31 December 2013, and then purchase the remaining £150,000 in the 1st January 2014 to 8th April 2014 period This would then entitle the business to deduct the whole amount as business expense under the AIA rules (assuming this was the only capital expenditure for the year). The business’ maximum entitlement will revert to £25,000 for its 2015 chargeable period.
Transitional rules apply where a business’ has a chargeable period that straddles the operative date of the increase or decrease in the AIA.
Writing down allowances reduce any balance of capital expenditure on plant and machinery that a business hasn’t been able to claim the annual investment allowance on, and on residual balances of expenditure that has been carried forward from the previous accounting period. This enables a writing down allowance of 18% per year.
Due to the likely life of computer hardware and software, businesses can use the short life asset rules to write off the cost of an asset over its life in the business. This is done by putting the expenditure on that asset in a single asset pool and having balancing adjustments when the asset is disposed of or scrapped.
Capital expenditure on the acquisition of computer software for trade purposes is treated as having been incurred on machinery for the purposes of capital allowances, and as such will be treated as receiving writing down allowances in the same way as other capital allowances (provided it has an expected lifespan of more than two years).
If the software is likely to last for less than two years and is written off in the accounts in the period of purchase, then it may be possible to claim the expenditure as a revenue deduction. This same rule applies where a licence is purchased for software by way of regular instalments as opposed to the software being purchased outright.
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