DCA REVIEW Resilience & Operational Best Practice
Understanding the data on capital allowance tax relief
By Louise Barth, VP, Altus Edwin Hill.
INVESTING IN A DATA CENTRE can be expensive. Whilst in the UK there is currently no special tax treatment for the data centre industry, knowing your way around the capital allowances minefield can bring substantial tax relief benefits. Louise Barth, Vice President of Capital Allowances at Altus Edwin Hill explains how specialist advice on capital allowances can unlock significant savings to companies in the data centre Industry.
The future is bright for the data centre Industry. It is one of the fastest growing sectors within the UK with growth forecast to continue well into the next decade. It is not all plain sailing, data centres are very expensive pieces of kit in their own right. These buildings are packed full of electrical and mechanical systems and consume huge amounts of energy in order to run the equipment, keep it climate controlled and secure.
With a need for companies to meet their financial requirements coupled with keeping stakeholders happy, reducing expenditure and increasing IRR is always a priority. Capital allowance tax relief provides an excellent opportunity for companies in the data centre industry to set aside significant set up and operational costs, and increase profitability. Regardless of whether you are a landlord, tenant or an owner occupier if you have incurred the expenditure, own and use the asset in the course of your business and a UK tax-paying entity, you are legally entitled to claim capital allowance tax relief.
Capital Allowances is a highly specialist subject, using a mix of surveying skill and accountancy knowledge a consultant will carry out a survey of a property to identify all the claimable plant & machinery and review the cost information in order to allocate the correct cost to each individual item. A typical list of plant will include amongst other items - IT equipment, air-conditioning, lighting, power distribution, fire suppression and alarms, UPS, plenums, controls, security
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systems and backup generators. To the base cost of each item a proportion of the site overhead costs and design fees are also added. The cost of cutting and carving an existing building to install the equipment is also claimable. A good understanding of how a project is procured and executed helps. Consulting alongside the design team at the planning stage or as the project builds out will ensure higher achievable claims.
A new Tier 3 Data Centre costing c£20m to construct on a Brownfield site in the UK could contain as much as £15 million of allowances, this equates to cash savings of approx £3.25m to a company paying corporation tax, almost double this to an individual paying income tax. The allowances, separated into two pools, are written down against the business’s tax liability over a number of years at 18% and 8%. This represents a huge opportunity for investors to recover a significant amount of their outlay.
In order to benefit from these savings allowances are claimed via a tax return. If a business is unable to take advantage of their allowance in the current open tax year, all is not lost as the allowances are carried forward until the business is in a profit
making position. Claims can also be made on historic expenditure as long as the assets are still owned and a claim has not previously been made for these assets.
ECA’s – a Green Advantage Government policy on Climate change offers a generous tax incentive for installing energy and water saving equipment. Enhanced Capital Allowances (ECA’s) provide a 100% relief in the year of purchase so long as the equipment is sourced from the Government approved list (
www.etl.decc.gov.uk).
The list includes UPS, generators, BMS, variable speed drives and many components in packaged chillers. Simply put the tax relief jumps from 8% per annum to 100% per annum. What more of an incentive do you need to go green? Aside from 100% relief, ECA’s can help to reduce the bottom line, running costs, energy consumption and the environmental impact of a data centre.
Whilst capital allowance tax relief is a specialist field, and the methodology complicated, it is not necessary for the process of claiming them to be painful. Expertise in this field can unlock significant tax benefits to businesses within the data centre industry.
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