Quarterly News

The early claim catches the credit

If you are self employed and planning on investing in plant and machinery for your business you might be entitled to cash in the form of tax credits but prompt action may be needed.

Capital expenditure on most forms of plant and machinery (except cars) up to £50,000 per annum now qualifies for 100% tax relief. This is known as the Annual Investment Allowance (AIA) and is a capital allowance relief available to most businesses for expenditure incurred since April 2008. A significant spend by a small business could have the effect of reducing the taxable profit to such an extent that the individual taxpayer becomes eligible for tax credits. Tax credits are broadly aimed at low income families. However surprising entitlements can arise at times of income fluctuation, such as large capital allowances resulting in reduced trade profits.

Take the example of a self-employed electrician who has two children at school and who normally earns about £36,000 after expenses per annum. His spouse has no income. He buys a new van costing £20,000 for exclusive business use in his accounting period to 31 March 2009. Let's assume that he had not claimed tax credits before because it was 'too much hassle for £545'. In 2008/09 he will be entitled to several thousand pounds of tax credits as his trading income is only £16,000. He will also be entitled to a further significant amount for 2009/10 because the claim will initially be based on the 2008/09 income and is not displaced provided that his actual income in 2009/10 year is not more than £25,000 higher.

However the claim for tax credits is time sensitive so by the time you provide us with your annual accounts information, you may have missed the chance to claim some of the amount on offer. This is because a tax credit claim can only be backdated by three months from the date of the claim.

You may therefore wish to consider making a protective claim for tax credits where there is any possibility that this may apply to you in the future. These may initially show that you have no entitlement but may result in much higher claims when adjusted for the lower income after claiming AIA. You can check your entitlement using the calculator on the HMRC website www.hmrc.gov.uk

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Every pound counts

The AIA has now been increased from £50,000 to £100,000 in the Finance Act 2010.

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