IT Hardware: How To Fund Investments In Your Business IT Equipment
This is a guide for any UK SME thinking of investing in new IT hardware over the coming 12 months. In the following pages we explain the three top money-saving strategies for IT hardware investments - including Corporation Tax reductions for capital spend, small business grants, and asset finance to spread the cost of investment.
As a specialist IT managed service provider for SMEs, TMB provide tailored advice and investment support for any business looking to expand or refresh their IT asset base. To find out more, or to discuss how our support for any business looking to expand or refresh their IT asset base. To find out more, or to discuss how our support services could benefit you, please call 0333 900 9050, or email firstname.lastname@example.org.
Why invest in IT hardware?
All IT assets need replacing eventually, and most businesses have a rolling strategy in place to replace laptops, servers, and smartphones as they approach end of life. However, sometimes it pays dividends to review your IT hardware infrastructure as a whole and assess how well your hardware aligns with your business goals, and if investing in new IT assets could help boost productivity and efficiency.
The cloud software revolution
The Brexit-driven need to find new markets and to maximise productivity, plus the pandemic-inspired drive to make communication technologies work more effectively for remote teams, has induced a welcome adoption of many cloud-based collaboration technologies. But it has also highlighted the pressing need for IT hardware investment across all sectors to consolidate recent gains and take advantage of the growth options some enterprises have discovered almost by chance. After all, the latest software is worthless without the requisite IT hardware to operate it.
As always, capital investment is the key to unlocking the benefits of the cloud, yet is also the major barrier for many businesses. In a cash-strapped economy, ‘spending more to save more’ is simply not an option for many businesses emerging from the pandemic.
However, data-driven business intelligence, alongside private and government-supported finance schemes, can help owners, departments and managers make the kind of timely interventions and informed decisions which have the potential to fuel real growth. What is more, there is ample concrete evidence that money spent on IT infrastructures does deliver a healthy return on investment.
Adopting new IT hardware technologies
For SMEs, the adoption of emerging hardware technologies can do more than simply support stronger business performance. A planned digital transformation can often help overcome some of the inequities and size-related drawbacks they habitually face in the business marketplace. Even where financial resources are modest, the introduction of faster laptops, bigger servers, and better smartphones can make a critical difference to productivity.
With this in mind, let's look at the three financial strategies all businesses should consider when investing in IT hardware:
1) Corporation Tax Incentives For Capital Expenditure - Act Now To Save On Your Tax Bill
One effect of the pandemic was to drive the UK’s capital investment levels down even lower, at a time when there were already concerns afoot about low productivity and a lack of skilled workers. To address this, the government has brought in generous (but temporary) capital allowances to encourage stronger business investment and thus promote business growth and stimulate the wider economy.
Described as a ‘super-deduction tax break’, this new measure allows businesses to reclaim 130% of their spending on ’plant and machinery’ against their taxable profits. Why this could be critical for small business is that IT infrastructure investments fall within this scheme’s definition of plant and machinery spending, which means they too qualify for this super-deduction rate.
Thanks to this new measure, a business making a qualifying investment between 1st April 2021 and 31st March 2023 can claim this super-deduction
first-year allowance at the newly boosted rate. Prior to this, main rate assets would have qualified for an allowance of just 18%.
The level of company expenditure qualifying for this tax relief has not been capped. That means, subject to their tax status, companies of any size could
see additional savings in the region of at least 25p per £1 of investment funding, with larger businesses spending in excess of £1m able to recoup even greater savings.
For businesses, this could be a green light to commence a planned digital transformation, or any similar initiatives with the potential to boost productivity. From an IT infrastructure perspective, main rate tax relief can be applied to investment spending on hardware, servers, computer equipment, and locally installed software, including custom software developments (cloud-based SaaS software is not included). Any company with pre-Covid investment plans still on the shelf may see this initiative as a game-changing incentive to dust them off and get talking. And likewise, those businesses with IT systems which have struggled to cope with the lockdown landscape and beyond, or companies striving to support a team trying desperately to work from home, will be pleased to hear that practical relief is on the horizon.
Companies are advised to consult a good accountant or tax advisor to ensure any planned spending is compliant with HMRC rules, and your business derives the full benefit from these arrangements
2) Recovery & Development Grants For Small Businesses
Grant funding for IT infrastructure investments has become a more realistic proposition since the government announced a £20m grant package for small
businesses to support the Covid recovery. This enables SMEs to apply for grants of between £1,000 and £5,000. Applicants can spend the money on purchasing new equipment, and/or securing both IT and business-related professional advice.
In practical terms, companies can use grant funds for equipment purchase as well as to buy in expertise in areas such as finance, accountancy, HR, legal, IT and digital. The fairly broad range of qualifying options also extends to include meeting the cost of staging events offering guidance to companies about overcoming the challenge of coronavirus.
Another grant-funded category covers minor equipment purchases, where the aim is to adapt existing technology, or adopt new technology, specifically to diversify or continue trading activities limited by the pandemic.
The funding source is money committed by the UK to the EU’s Regional Development Fund before Brexit, with the grant money administered via the UK Government’s 38 dedicated regional growth hubs. Confirming the status and purpose of this new and very welcome grant funding, Simon Clarke, UK Regional Growth Minister said: “Businesses will be able to use these new grants to pay for the expertise, equipment and technology they need to adapt, recover and rebuild.”
Elsewhere, the extensive Charity Excellence Framework website offers valuable support for charities with a vast range of grants, IT support for charities, plus lots of free software and computers. Companies will also find a variety of listings for other sector-specific grant funding sources on this page. In addition, the Charity Excellence Framework site lists details of free IT/Digital Tools and free online learning resources. Although this portal is largely designed to support charitable enterprise, the sheer number of options posted are sure to include grant funders with qualifying criteria broad enough to accommodate businesses who can provide evidence of the wider benefits their proposed project will offer to communities, individuals etc. Another useful aspect is the site’s external links to yet more grant-funding databases and free resources.
3) Asset Finance Solutions
While government and sector-specific grants are useful for small investments, their relatively modest ceiling does not cover the large cost of a complete IT infrastructure overhaul, or large-scale investments. For these, companies have to fall back on their internal resources, credit agreements with hardware vendors, or take out a commercial loan. Before you contact your bank or lender, however, you should consider asset finance as an alternative to traditional borrowing.
What is asset finance?
Asset finance is a convenient and cost-effective method of acquiring IT hardware or other high-value assets without the capital expenditure of outright purchase, or a monetary loan. Asset financing is available through a leasing company as a hire purchase or finance leasing agreement. This is how it works:
- The leasing company/lender purchases the IT hardware on behalf of your business, which remains owned by the leasing company for the duration of your asset finance agreement.
- Your company leases the hardware from the lender in exchange for regular finance payments, covering the value of the equipment plus interest over the arranged term. Interest rates are usually fixed for the duration of the term.
- Asset finance terms are usually between two and five years, or to coincide with the typical life cycle of the hardware, allowing your business to spread the repayments sum into monthly payments.
- Finance is secured on the IT hardware so, unlike a secured bank loan, you do not need to provide collateral, nor have an extremely high credit rating.
- HMRC will allow claims for 18-40% of your deposit and repayment costs. VAT is charged on your monthly hire charges rather than on the deposit price.
Depending on whether your agreement is hire purchase or finance leasing, there are several possible outcomes at the end of your finance term:
1. Payments cease and the IT hardware is returned to the leasing company
2. Payments cease and you get the option to purchase the IT hardware for a nominal fee – usually the market value at point of access, minus depreciation and payments already made. (Some leasing arrangements allow clients to purchase the rental equipment at a much-reduced price at the end of the lease. Others permit the client to sell on their rental equipment and retain up to 98% of the selling price.)
3. You renew the agreement on the same or similar terms, with the same hardware
4. You upgrade your IT assets to a later model and renew the lease – this is extremely useful for expensive items with a short obsolescence cycle, e.g. smartphones and desktop PCs
Which option is best for your business?
TMB are not financial agents or brokers, so we strongly recommend consulting a qualified and accredited advisory business before making a decision. However, for IT assets the finance leasing arrangement (options 3 and 4 above) is probably the most popular. Here businesses can set up a low deposit scheme with fixed monthly repayments, facilitating budget arrangements and limiting the need to sacrifice large amounts of working capital.
Companies enjoy tax allowances and VAT-exempt repayments for the duration of the lease and are not burdened with ownership of out of date IT equipment at the conclusion of the contract. Instead, the arrangement offers businesses the opportunity to upgrade to the latest IT hardware automatically, without repeated capital spend every few years.
The drawback of finance leasing is that the finance company retains full title to the hardware, which are effectively hired to the purchaser for the duration of the leasing contract. This method represents a low deposit, low fixed payment means of acquiring the critical IT infrastructure equipment you need to support growth and expansion initiatives – but it could prompt the recall of the equipment should the leasing company go under. This risk is
enough to sustain a modest hire purchase market among asset finance companies dealing in IT hardware.
While the details of asset finance agreements vary in each case, for a small business the primary benefit is the opportunity to acquire the very best IT hardware via tax-efficient repayment schemes your company can meet and afford.
Next Steps - Contact TMB Today For Personalised managed IT Support Services
At TMB, we offer flexible managed IT services to help SMEs streamline their operations, increase productivity, and obtain their growth goals. This includes advice about setting up the right infrastructure to support your goals, and implementing the cloud-based tools to allow easy collaboration between your colleagues, suppliers, and customers.
To find out more about our range of support services, please get in touch today by phone or email to discuss your requirements.
Tel: 0333 900 9050