capital allowances

Tinkering with tax simplification

Over 1,000 tax incentives have been identified and collated as part of the first stage of the Office of Tax Simplification work – tax advisers across the UK nod wearily! The next step is to review which tax incentives can be eliminated to ‘simplify’ UK tax. Target date for the first review is the next Budget scheduled for 23 March 2011.

I’m in two minds about this – on the one hand, there is little doubt that UK tax legislation has got way out of hand in terms of complexity (for many accountants lets alone business owners!). On the other, there are many targeted tax incentives which appear to have worked well to promote future growth areas e.g. R&D tax credits and the forthcoming ‘patent box’ (promising lower rates of tax) encourage innovation and enhanced capital allowances encourage investment in greener plant and machinery. There are plenty of other targeted tax incentives aimed at putting our economy on a firmer footing for the longer term future. Look at the Dyson Report on Making Britain a Hi-Tech Exporter and the recent Blueprint for Technology report for further support for targeted tax incentives.

Taxation can be effectively used as a carrot to incentivise investment (both cash and more importantly entrepreneurial zeal) in key growth areas, such as intellectual property-rich digital, tech and creative industries; those businesses and sectors that should provide longer term prospects for a healthy UK and global export economy. So why tinker?

Having said that, the relatively recent announcement to provide new start-ups with a holiday from National Insurance Contributions sounds well placed and simple enough – until you look at the detail (and this is just a summary of the detail!).

Overall, I am concerned that putting an axe to scores of these targeted tax incentives in the name of ‘simplification’ could have far-reaching and painful longer term repercussions for the UK economy. Yet we do need to plot a way through the streams of red-tape and bureacracy facing businesses so things must change.

Welcome your views.

Getting maximum tax relief on new equipment purchased for your business

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…

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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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Capital Allowances for fixed asset expenditure – a brief recap!

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 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!)