Annual investment allowance and tax credits

Business is poor, money is tight and even worse the firm’s van is on its last legs and without it you can’t trade. But is there a way you can afford a new van with some help from the Taxman?

Nothing for free
It’s an old adage that there’s no such thing as a free lunch. That may be so but you might be able to get a free van or other equipment for your business at the Taxman’s expense. Here’s how.

Case study
Miss X is a single mother who owns and operates a sandwich delivery business. The van she uses has become unreliable but she can’t afford to replace it. If the van completely fails, so will her business. How does she escape this dilemma?

Annual investment allowance
The new capital allowances rules, that came into effect in April 2008, allow a 100% deduction for the cost of plant and equipment used in a business on expenditure of up to £50,000 in one year. This is called the annual investment allowance (AIA).

Miss X’s van qualifies as equipment and is therefore subject to the usual rules: expenditure on a replacement would qualify

The full cost of the new van will be allowable as a deduction from Miss X’s taxable profit. Thus, if her profit ignoring the cost of the new van would have been £27,000, and the new van cost £18,000, her revised profit is £9,000.

Tip. If you can’t afford to buy the equipment outright, a hire purchase agreement could still allow a deduction from your taxable profit of the full value of the asset under the AIA rules.

Tax credits
Miss X’s profit for income tax has been radically reduced by the AIA on the new van. This has a dramatic effect on her eligibility for tax credits.

Miss X’s income has been more or less stable for a couple of years, around £27,000, and her accounting year ends on March 31. If she bought the new van for £18,000 in March 2009, she could claim the AIA deduction against her 2008/9 profit.

Miss X notifies the tax credits people by July 31 2009 of her much lower profit for 2008/9. As her tax credits award for that year was originally based on an income of around £27,000, she will now be owed a lump sum award of around £7,000

Disregarded income
The tax credit rules disregard an increase in income of up to £25,000, so Miss X’s 2009/10 tax credits will be based on the much lower 2008/9 profit figure, providing her profits don’t exceed £34,000 (£9,000 profit plus £25,000) for that year.

The final result
The cost of her new van (£18,000) has been paid for as follows:

• AIA relief on cost of new van - £5,040
• extra tax credits for 2008/9 - £7,000
• extra tax credits for 2009/10 - £7,000
• a total tax benefi ts package of £19,040.

Tip. The AIA applies to all equipment, not just vans. So if your profit is reduced as a result of an AIA claim, tell the tax credits people.

The next step
The annual investment allowance provides a 100% tax deduction for the cost of equipment. It will also reduce your profit for tax credit purposes and could increase your claim, so notify the tax credits people of your reduced income.

If you would like any help to see if you could benefit please contact me.

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