Is claiming capital allowances the only way?

Is claiming capital allowances the only way?

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The situation is that we are an internet service provider. We have many thousands of pounds of equipment in use, being servers etc both for email & websites but we also "sell" space on our servers to others offering similar businesses or firms that need a server but don't want the hassle of running it themselves. Some clients "rent" their own server and others "rent" a share in a server with others, depending on what they need.

Upto this April, we could get the 50% FYA and then 25% WDA for subsequent years, which was acceptable by us. We reckon the equipment has a useful life of 3 years as we have to keep it upto the latest standards - some servers will be replaced far more quickly.

We make our own equipment - we buy the components and build the systems ourselves. Very little is "off the shelf". Once something is taken out of action, we'd strip it down and reuse what we can, like leads, casings, power supplies, etc, but the processors and chip boards etc are typically scrapped.

Under the new CA regime, true we can get full 100% relief on the first £50k of spending, but we spend far more than that and at just 20% WDA, there is still plenty of "cost" left on which to claim CAs even when the asset is taken out of use.

I am aware of the special rules for "leasing companies" and CAs but don't think that we qualify. The way we offer our services isn't to formally rent a server but to offer a service of giving clients server-space. The clients never see or touch "their" server and it is quite likely that "their" server changes several times without them even knowing it as we regularly migrate client's data from machine to machine - i.e. if a particularly powerful server is being used by very low usage clients, we may well move them to a lower spec server and save the better ones for higher users. So, in effect, a client isn't "renting" anything at all, except a service. Furthermore, we have no formal leases - clients pay monthly and can stop paying for their "service" at any time.

Is it acceptable to account for this through prepayments. I..e. in year one, we spend £100k on servers, they'll last 3 years, so we do a year end reversal of £67k put to prepayments, leaving the P&L COGS charge as being £33k. In year 2, we take another £33k from prepayments to P&L. Same in year 3, leaving a nominal balance of say £1k which could be written off in year 4. To my mind, this gives us tax relief better related to asset use and write downs rather than using the new CA rules.

Anyone got any ideas of how to get better tax relief. After a few years, I can see we'll have a tax WDV of many hundreds of thousands pounds, with the underlying assets being virtually worthless.

Ken Howard

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
12th Nov 2008 09:25

How about
Short life asset elections?

You de-pool each server as it comes into use, and then when it is scrapped you will get a balancing allowance of the amount in the pool. If you keep it for more than 4 years you must put it back in the pool at the end of that period.

See CAA 2001 S 86. I don't think any of the rules preventing de-pooling apply to you but you should check Section 84 to be sure.

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