Substantial capital allowances are available on the construction of data centres. Up to 90% of expenditure on new build date centres, or higher, can potentially qualify for capital allowances. The reason for this high level of allowances is that the buildings are normally quite simple enclosures containing vast amounts of mechanical and electrical plant.
Types of allowances
There are two main categories of capital allowances – general pool and special rate pool. General pool includes fire alarms, computer equipment and sanitary ware and has a writing down allowance of 18%. The special rate pool includes heating, air conditioning, electrics and hot and cold water systems.
Conversion of a building into a data centre
Converting an existing building into a data centre is likely to result in a high proportion of expenditure qualifying for capital allowances. This is because a data centre usually requires a high level of spend on air conditioning, UPS, generators, security, gas suppression system, cabling and of course IT equipment.
From our recent experience of data centres we estimate that circa 80% to 90% of the expenditure will qualify for capital allowances.
Enhanced Capital Allowances (ECA)
There may be scope for 100% allowances on certain energy efficient items including UPS (uninterrupted power supplies), CRAC units (Computer Room Air Conditioning), fire suppression systems, lighting and air conditioning, and for water saving plant including low flow taps. ECAs enable you to claim 100% first year capital allowances on your expenditure on qualifying plant and machinery. This means the tax savings are all available in the first year. These assets would otherwise attract the lower writing down allowance at 8% per annum. For an item to qualify for ECAs it needs to be on the ECA list before you purchase the product. The lists can be found at: http://etl.decc.gov.uk/etl and http://www.watertechnologylist.co.uk/
Lighting is not on the list and instead has to meet a certain specification. A capital allowances specialist can advise which plant items will qualify for ECAs during the design stage and influence specifications rather than reviewing the project on completion and finding that no ECA items were specified by the designers. Early involvement will enable specialists to liaise with the construction project team and maximise on an ECA claim.
There can be very substantial costs for these buildings for connecting to the grid for an electrical connection. Claiming capital allowances on these costs needs to be carefully considered and documented.
Data Centres and Business Premises Renovation Allowance
For existing buildings which are converted to data centres it may be possible to structure these depending on the location geography to benefit from 100% capital allowances on the conversion costs with all allowances being available in the first year. It will be worth considering if this is feasible.
150% tax reliefs are available for expenditure incurred on cleaning up existing sites or converting existing properties. This specific tax relief is only available to UK companies that are incurring the expenditure. This tax relief applies to both investors and developers but does not apply to individuals or offshore investors.
For a site which has £1m of this type of expenditure, it can create a tax shelter to an investor or occupier of £1.5m. Incidental costs like fees and contractors overheads can also be included which may increase the claim further.
Where existing buildings converted to data centres, there may also be an opportunity to claim some of the works as repairs. For example expenditure on redecoration, window and roof repairs is often not nicely segregated. A specialist can carefully segregate to exclude improvement expenditure. There could be 10% or more expenditure that qualifies as repairs. It is important for repairs to consider the accounting treatment at an early stage.