Annual Investment Allowance

March Budget 2014 – Key points for Digital, tech & creative companies

Posted on March 20, 2014 by Tax N2K 0

Highlights include:

  • Increase in payable R&D tax credit for loss-making SMEs from 11% to 14.5% for expenditure incurred on or after 1 April 2014. This means that approximately 33% of qualifying spend is eligible for a tax credit rather than the current 24.75%
  • Seed EIS (SEIS) turned into a permanent tax relief given its success along with the 50% CGT exemption for gains reinvested
  • Doubling of the Annual Investment Allowance from £250,000 to £500,000 for expenditure incurred on or after 1 April 2014 for companies until 31 December 2015. This will allow 99% of companies to get 100% write off of their investment into capital expenditure in the year of expenditure (excludes buildings and most cars).
  • Personal allowance increase to £10,500 from April 2015 (£10,000 from 6 April 2014) and an increase in the basic rate tax band to allow higher rate tax payers to receive some of the benefit.
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Buy 10x more equipment and get 100% tax relief!

Posted on January 17, 2013 by Investing in equipment 0

Not overly helpful to the majority of fast growing UK companies but the annual investment allowance for expenditure on machinery, equipment, furniture etc went up from £25,000 to £250,000 with effect from 1 January 2013.

This means that you could purchase (in theory!) £250,000 of laptops, tablets, desks, chairs etc in a financial year and receive a 100% tax deduction against your taxable profits.

So just imagine, you could splash out on:

and receive £250,000 tax relief!

Not very likely – but still, nice to know….

Watch out for financial accounting periods that straddle the 1 Jan 2013 introduction date as you’ll need to calculate how much qualifying spend is eligible under the ‘old’ £25,000 limit to 31 Dec 2012 and how much falls within the new much higher limit from 1 Jan 2013.

As ever, timing is everything!

(And no, cars do not qualify for relief under this Annual Investment Allowance (AIA) )

 

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Getting maximum tax relief on new equipment purchased for your business

Posted on August 16, 2010 by Investing in equipment 0

When considering purchasing that shiny new MacBook, desk, printer etc (or pretty much any other capital item) for use in your business, you should think about how you can get the best tax result (as well as considering the best model and price).

Purchased computer equipment, furniture and other plant & equipment is not simply deducted from your profits for accounts and tax purposes. Such items are treated as ‘fixed assets’ in your business accounts and depreciated over their useful economic lives e.g. a £600 laptop might be written off against your business profits over say 3 years (at £200 per year). But tax doesn’t necessarily follow this treatment – that would be far too straightforward!

The Capital Allowances tax regime governs the UK tax treatment of fixed assets in order to provide a degree of uniformity given that depreciation policies can differ between different companies.

The good news is that the capital allowances regime has been significantly simplified over the past few years for the majority of UK businesses. Since 2008, the Annual Investment Allowance (AIA) was introduced which allows businesses (except LLPs) to deduct expenditure up to a certain amount each year from taxable profits in Year one ie 100% tax write off immediately against profits.

The AIA originally started at £50,000 per annum, then went up to £100,000 with effect from 1 April 2010 for companies (5 April 2010 for unincorporated businesses) although it has recently been announced that this will decrease to £25,000 from April 2012.

A key tax planning point therefore is to accelerate planned future significant capital expenditure before the capital allowance rates decrease in 2012.

Care needs to be taken in applying these limits in periods where the limit has changed e.g. a business with a 31 December 2010 year end would need to pro-rata the AIA limit given that the allowance changed from £50,000 to £100,000 with effect from 1 April 2010 for companies.  The entitlement is broadly £87,500 AIA for a 31 December 2010 year end, however, some nifty legislative drafting ensures that companies that may have already invested the full £50,000 before the 1 April 2010 (as it otherwise would have been permissible pre the Budget announcement) are not unfairly penalised.

Note that cars are not eligible for the AIA – although there is a some simple tax planning available to fund car purchases with significant tax relief, but I’ll leave that for a future post…

Photo credit

As always the above information is for guidance and educational purposes only and does not constitute professional advice. Please seek professional advice specific to your facts and circumstances (as tax law can be pretty complex and changes fairly frequently!).

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7 tax incentives for UK digital & technology startups

Posted on July 19, 2010 by Startups Tax Tips 1

HOT OFF THE PRESS: We’ve just launched a brand new online course that shows you exactly how to complete and file your SEIS / EIS advance assurance application with HMRC. We walk you through every stage of filling out the form plus share some additional resources to help ensure a smoother passage through HMRC. Access it by clicking here. [Use the code: SEISAA2017 to get 50% off in January]

Having taken the risk and side-stepped the typical job route to become a tech entrepreneur and wealth-creator, its a good job that there are still some tempting UK tax incentives out there to support you.

Here are just 7 tax ideas or tips that you should be thinking about for your digital technology start-up:

  1. Entrepreneur’s Relief – if you hold 5% or more of the shares in your startup for 12 months and work as an officer /  director or employee, then when you come to sell the shares your effective tax rate will be just 10% on the gain. This is limited to the first £10m of gain over your lifetime . Sure beats an income tax top rate of 45%! Make sure you take this into account when setting up your company to ensure founders (and key employees) maximise this essential tax relief. You’d be gutted if you unwittingly held just 4% of the shares!
  2. R&D tax credits – get rewarded by the tax man for innovating in your sector by claiming this lucrative tax relief. Many entrepreneurs mistakenly believe that this tax incentive relates solely to industries with scientists wearing white lab coats but this couldn’t be further from the truth. This relief applies across industries – I have enjoyed particular success in the tech sector, for example, I have secured a £250k tax refund for a tech startup that had been (wrongly) advised by its accountants that it wouldn’t qualify for this relief! Most repayments are processed by HMRC within 30 days of a claim and you only have 2 years to make a claim before you’re time-barred. Don’t leave this cash on the table.
  3. Enterprise Investment Scheme – angel investors and private individuals are incentivised to invest in (perceived) higher risk investments like early stage start-up companies with tax breaks like the Enterprise Investment Scheme (or EIS as its more commonly called). Now is not the time for the exact detail suffice to say that many tech or digital startups would fall within the qualifying criteria thereby allowing smart investors to reclaim 30% income tax relief subject to certain limits. Just be aware for now that this is out there to tempt investors. [Update: Seed Enterprise Investment Scheme (SEIS) introduced since this post]
  4. Temporary National Insurance Holiday – for new businesses there is a recently announced temporary NI holiday for the first 10 employees limited to £5,000 per employee or £50,000 overall. The scheme officially kicks off in September 2010 however there should be relief for businesses started post 22 June 2010. This relief is location specific with most of the South East barred so you need to check qualifying locations. Startups across the North will qualify so now is a good time to start building your team.[Update: Now gone – there is an Employer’s NIC £3,000 annual allowance at the time of writing Jan 2017]
  5. Get paid at mouthwatering tax rates compared to most employees – once you get past the pre-revenue stage and start making profits, shareholders of small companies have the flexibility to structure their remuneration package to optimise take-home pay. Why pay up over 20%, 40% or even 45% income tax and incur huge National Insurance costs on employee salaries when you can pay yourself a combination of a small salary, dividends (and pension contributions) which, if carefully managed, can result in £nil income tax or NI for c£40k of remuneration. [Update: Dividend tax rule changes since 6 April 2016 reduce benefits]
  6. Get 100% tax relief on your new equipment – so you need to invest in new Macbooks, laptops, servers and other gadgets for your business. You can claim 100% tax writing down allowances (‘Annual Investment Allowance‘) against profits on your ‘first’ £200,000 (!) of capital expenditure each year [note: this relief has bounced around in recent years since; be wary of timing – it is £200,000 at the time of this update (Jan 2017)]
  7. Patent innovation box – coming soon (allegedly) will be a ‘patent box’ which will allow income or profits on registered patents to attract lower company tax rates of c10% (as opposed to a current lowest corporation tax rate of 20%.

If you’d like to discuss how any of these tax incentives could be applied in your business, please drop me a line via the contact page or you can find professional specialist advice and help at ip tax solutions. Happy to discuss.

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Capital Allowances for fixed asset expenditure – a brief recap!

Posted on May 18, 2010 by Tax N2K 0
capital intensive shirt

[Note that much of the information below has since changed following subsequent announcements – please check more up-to-date posts]

A raft of tax changes is expected to be announced in the emergency budget scheduled for 22 June 2010 including potential changes to tax relief on capital expenditure – such tax relief is referred to as “capital allowances” in the UK tax code.

“Capital expenditure” means expenditure on fixed assets such as laptops, PCs. equipment, furniture, cars, vans etc, generally anything that you buy and intend to use for at least a couple of years in your business.

So if I spend £1,000 on a new laptop for my business, I would receive tax relief in the form of capital allowances rather than deducting the cost directly from my profits in the year.

The Conservative Party has previously expressed a wish to “simplify” the corporation tax regime and therefore the elimination of the wide and varied tax system of capital allowance reliefs could be a drastic yet possible option.

In the meantime, let’s recap on where we are now for UK capital allowance purposes (so you can see how simple it already is :)):

  • Annual Investment Allowance – this will cover the majority of annual capital expenditure for most UK businesses. The annual investment allowance (or ‘AIA’ as us tax folk affectionately call it!) was increased from £50,000 per year to £100,000 with effect from April 2010. So pretty much any capital expenditure incurred (except buildings and cars) gets allocated to the AIA and you get 100% tax relief in year one. You only get one AIA to spread amongst the group if there’s more than one company. AIA applies for companies, partnerships (be careful who the partners are) and sole traders.
  • Enhanced Capital Allowances (or ECAs – see what we did there again?!?). Good if you can get them as ECAs attract 100% tax writing down allowance in year one plus if the company is loss-making in the year and purchases qualifying ECA assets then the company can claim a cash tax refund from HM Revenue & Customs. Qualifying assets include water conservation kit and certain plant & equipment that reduces CO2. You can find the precise list of qualifying assets at www.eca.gov.uk. Certain cars also qualify for ECAs – those with CO2 emissions less than 110 g/km (at the moment although this keeps being revised downwards).
  • Short Life Asset elections (‘SLA’) – ideal for assets purchased which are scrapped or sold (for not a lot) less than 5 years after acquisition. Speeds up tax relief compared to the General Pool (see below). Downside is that the tax calculations and monitoring of each asset can become hideously complex and time-consuming plus it does not apply for cars or buildings.
  • General Pool – anything over and above the AIA, ECA, SLA pools get allocated to the General Pool. Try to minimise the amount that gets allocated to the General Pool as relief is slooooow – typically about 20+ years to get full tax relief even if you trashed that pc some 18 years earlier. (Trash being the operative word!). Tax relief in the General Pool is received at a rate of 20% reducing balance hence its lack of speed of relief. Best avoided where possible – ideally with a bit of nifty tax planning.
  • Special Rate Pool – don’t be fooled by the name! Its not special in a good way – although it has at least opened the door for tax relief on more assets than was available before its intro in 2008 – as tax relief is obtained at just 10% reducing balance (who knows where we’ll be by the time you get full relief under this….!). Aimed primarily at integral features within buildings (e.g. lighting, elevators, air con, lifts etc) it also includes ‘naughty’ cars (see below).
  • Cars – used to have their own regime (for cars costing more than £12,000 bizarrely being referred to as ‘Expensive Cars’!) and still do to an extent although they are being subsumed within the above capital allowance classifications based on the specific CO2 emissions. So the ‘good’ cars with low emissions get 100% relief; the middling cars get General Pool treatment at 20% and the bad boys get 10% relief in the special rate pool.
  • Buildings – nowt, nada, nothing, diddly-squat. Gordon Brown pulled the plug on Industrial Buildings Allowances (‘IBAs’) in 2006 with relief being phased out by 2011.

So there it is – a whirlwind tour of UK capital allowances as they stand today. No sooner than you’ve digested this, I fear that George Osborne will stand up on 22 June 2010 for his Budget announcement and either scrap most / all of it or at the very least tinker (they can’t help themselves!).

Welcome to my world…..

(P.S. If you feel that a ‘capital intensive’ t-shirt would be apt for your loved one or little bundle of joy then click here!)