What is the super deduction tax relief and what does it mean for fintech purchases?

The super deduction is a time-limited tax relief, first announced in March 2021, to incentivise businesses to invest and improve productivity levels in the aftermath of Covid-19. It is hugely generous as qualifying spend benefits from tax relief of 130%

The relief applies to fixed and intangible assets, including financial management software, such as ERP, accounting, accounts payable and accounts receivable tools. Intangible assets must be recognised as capital rather than revenue items to qualify for the allowance. 

This creates a compelling opportunity for companies to undergo digital transformation by investing in leading financial management software tools they can leverage now and in the future.

The deadline for qualifying expenditure is March 31, 2023.

This primer on the super deduction is to ensure you can claim back maximum costs for software you’ve already bought or for further information on what it relates to if you wish to take advantage of the scheme before the deadline. 

What Is It?

The super deduction was introduced as part of the Finance Bill 2021 and allows qualifying costs incurred between April 1, 2021, and March 31, 2023, to be deducted against a corporation tax rate of 130%.

This will allow companies to cut their tax bill by 25p (corporation tax will increase to 25% starting April 1, 2023) for every £1 invested in qualifying spend.

Ordinarily, corporation tax relief only applies to plant and machinery, but the super deduction can also be claimed against intangible assets, such as computer software. This is an acknowledgement by the Government that software costs can be significant and that their automation features can be a powerful driver of economic growth and productivity.

Example: 

• A company with £1 million in qualifying spend incurred during 2022 decides to claim the super-deduction
• They can deduct £1.3 million (130% of £1 million) against taxable profits
• Deducting £1.3 million from taxable profits means the company can save 19% of corporation tax (the rate in 2022), £247,000

Which Software Costs Qualify for The Super Deduction? 

• Capital expenditure on financial management software (This can be purchased from a third-party provider or can be developed in-house)
• External consultancy fees related to the capital expenditure (i.e., engagement from suppliers who help spec and implement your new financial management software)
• Capitalised staff costs relating to any integration work done

Tax is a complex area, and successfully applying the correct treatment to spend even requires judgement from tax experts. For example, this can include interpreting whether spend is revenue or capital and identifying qualifying incidental costs related to the implementation.

Additionally, there may be a need for the super deduction to be considered alongside other reliefs and allowances, such as R&D tax credits and tax loss rules.

Therefore, it’s probably sensible to seek professionals to help with applications for claiming the super deduction so that forms can be processed as accurately and efficiently as possible, with maximum amounts being sought successfully. 

What To Do Next?

Speed Up Purchasing Decisions

If you are in the process of making a significant software purchase or considering making one and want to claim it for the super deduction, time is of the essence.

Qualifying costs must occur before March 31, so it’s important to ensure associated spending takes place as soon as possible rather than being delayed. You don’t need to make a claim itself by this date as it can be detailed on corporation tax returns in periods ending on or after April 1, 2023.

Consider Amendments to Historic Filings

Suppose you haven’t made the super deduction claim on qualifying spend on your 2021 and 2022 year-end filings. In that case, you may be able to make retrospective changes to reflect reliefs, providing that forms were submitted less than 12 months ago. 

If you make changes successfully, remember to update accounting entries at year-end so the brought forward balances agree for the current period.

Act Now to Demonstrate Resilience and Agility

Accelerating your financial management software purchasing will allow your company to navigate the uncertain economic environment more successfully.

Automation features from accounting, ERP, accounts receivable and accounts payable software will remove many manual processes and enhance the accuracy and speed of data output.

This can be used to get a better view of real-time business performance, with finance staff resources being used to analyse data and advise on company strategy for how to best respond to challenges and opportunities.  

Don’t Miss Out on the Super Deduction for Your Financial Management Software

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