Does the UK’s super-deduction tax scheme favour on-premise infrastructure investments in the short-term?

Recommendation:

UK-based companies are possibly better off investing in on-premise infrastructure than IaaS-type Cloud infrastructure until 2023 due to the tax benefits included within the super-deduction scheme announced by the Chancellor in Mar ’21.

Background:

As part of the Budget 2021, the Chancellor, Rishi Sunak, announced a new capital allowance ‘super-deduction’ and first year allowance. The hope is that these will provide companies a stronger incentive to make qualifying investments and bring forward planned investments for future years.

Link to the full details on UK Government website can be found here.

Rationale:

In theory, as the tax break is on Capital expenditure, one can write off such investment against taxable profits. The allowance effectively allows a company to write off 130% of the capital value and it’s all up front. It would, in theory suggest, a tax benefit over the rental model where tax deductibility is based on 100% of the in year subscription only. So could take 5 years to get the deductions and only up to 100% of the value.

Key extract “The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies. The kinds of assets which may qualify for either the super-deduction or the 50% FYA include, but are not limited to: • Computer equipment and servers”

Obviously, it’s needs to be looked at on a case-by-case basis with the support of a tax specialist.

If we're wrong, we'd welcome input on what we're missing.