Business Tax Reform in the UK Introduces Annual Investment Allowance
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When a business buys a long term fixed asset it is normal to depreciate that
capital asset over a number of years to smooth out the effect on net profit.
Depreciation being a management decision is not allowed as a deductible taxable
expense and while being deducted to arrive at the management net profit is
written back in the accounts for the calculation of tax.
Capital allowances are set by the government at fixed rates at which a
business can claim the expenditure on fixed assets against the taxable profit.
Prior to the financial year commencing 1 April 2008 capital allowances included
a first year allowance at the rate of 50 per cent of the original cost for self
employed and small limited companies plus a writing down allowance in subsequent
years of 25 per cent of the reducing balance. The rate of first year allowance
for medium and large limited companies was 40 percent of the original capital
From the 1 April 2008 for small limited companies and from the 6 April for
self employed business the 50 per cent first year capital allowance is replaced
by an annual investment allowance at the rate of 100 per cent of the investment
subject to maximum expenditure of 50,000 pounds in the financial year and an
amount pro rata to that if for a small limited company financial year straggles
the 1 April 2008.
The writing down allowance is also changed from April 2008 being reduced from
25 per cent of the reduced balance to 20 per cent of the reduced balance.
The annual investment allowance applies to all assets categorised as plant
and machinery which includes most fixed assets including plant, equipment,
fixtures and fittings, computer equipment and commercial vehicles. As first year
allowances could not be claimed on motor vehicles not classed as commercial
vehicles the annual investment allowance also do not apply to motor vehicles
which are now subject to a reduced writing down allowance in the first year of
20 per cent.
A self employed business operating a standard financial year of 6 April to 5
April 2008 is entitled to the full 50,000 annual investment allowance. If, as is
the case of many small limited companies the financial year straggles the 1
April 2008 then prior to this date the first year allowance can be claimed and
in respect of expenditure on fixed assets after the 1 April 2008 the annual
investment allowance can be claimed with the maximum claim limited on a time
based pro rata basis.
Where the financial year for example is 1 January 2008 to 31 December 2008
the capital allowance claim in the first 3 months would be the first year
allowance at 50 per cent of capital expenditure. After the 1 April 2008 the
annual investment allowance of 100 per cent of the capital expenditure can be
claimed subject to a maximum claim of 9/12ths of the 50,000 being 37,500 pounds.
Where capital expenditure exceeds the annual investment allowance maximum
limit the additional expenditure will added to the existing unwritten down value
of the assets and the reduced writing down allowance of 20 per cent may be
claimed against the net taxable profit.
The annual investment allowance does not replace the 100 per cent first year
allowance schemes currently applicable to various green and environmental
schemes and approved research and development projects. The annual investment
allowance is complimentary to these schemes.
In addition for the financial year starting April 2008 small businesses which
have a written down balance for tax purposes of under 1,000 pounds will be
entitled to write off the total written down value as a capital allowance.
About the Author
Terry Cartwright, CEO DIY Accounting, a qualified accountant in the UK,
Accounting Software on excel spreadsheets that incorporate and automatically
calculate capital allowances and produce tax returns for self employed and small
limited companies plus
Software for small to medium sized business providing a complete accounting
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Article Published/Sorted/Amended on Scopulus 2008-06-03 23:14:39 in Tax Articles