Capital Allowances - Changes for 2008/9 tax year

As readers are no doubt aware, the system of tax relief on expenditure on equipment in your business is a complex one. Broadly, when you buy a piece of equipment to use in your business, you cannot normally set the full cost against that year’s profits, unless the value of the item is quite small, or a special tax relief applies.

The cost of more expensive items is written off against profits over a number of years, using the capital allowances system.

For expenditure incurred on or after 1 April 2008 for companies or 6 April 2008 for unincorporated businesses, it is proposed that up to £50,000 spent on equipment in one year by any business will be set-off in full against the profits for that year. This allowance should cover most items of equipment purchased by smaller businesses, although cars will not be included in this total. Where the expenditure on equipment exceeds £50,000 in one year, the excess will be written off at a rate of 20% per year rather than the current 25%.

Up until April 2008 the old system of capital allowances largely remains in place, and small businesses can claim a 50% first year allowance (40% for medium sized businesses) for the cost of new equipment purchased before 1 April 2008 by companies or before 6 April 2008 by unincorporated businesses.

Currently where equipment fixed in a building is used for your business, after the initial claim of first year allowances at either 50% or 40% depending on the size of your business, you may be able to claim 25% of the remaining costs in subsequent years against profits. This will be reduced to 10% per year on new expenditure from 1 or 6 April 2008 where the expenditure is not covered by the £50,000 annual allowance.

The tax savings which can be made by reducing your business’ profits are potentially high. Timing is important if you are planning additional expenditure on equipment or premises. This article simply provides a summary of the proposals and the transitional rules can be complex.

Article kindly provided by Danbro - Accountants.