Capital allowances are available on money spent on buying plant and machinery. A major reform of the system was introduced for individuals and partnerships on 6 April 2008.

From 6 April 2008 a business is now allowed to write off the total amount it spends on plant and machinery (normally up to a maximum of £50,000 per year) against its profits in the year of purchase. This represents a significant cashflow advantage to the business.

Example

Taxable profits of the business for the year
£30,000

If £20,000 had been invested in plant and machinery: –

New taxable profits (£30,000 – £20,000)
£10,000

Tax saving (£20,000 x 28% saving)
£5,600

Most basic rate taxpayers will be able to obtain a 28% saving in the year of purchase of the amount invested (20% tax saving and 8% national insurance saving). Higher rate taxpayers should receive higher savings.

This 100% write off is normally available for the first £50,000 spent per year by a business. The whole £50,000 limit will however not be available in certain cases (eg. if your accounting period is less than a full year, for the first accounting period ending after 6 April 2008 or if you have more than one business).

If your business is considering investing in plant and machinery and you wish to know whether you will be entitled to the full £50,000 allowance and how it will affect your tax position please contact me.

Added Benefit of Tax Credits

The extra allowances now available in the year of purchase of plant and machinery could mean that you will now be entitled to more Tax Credits. It could also mean that those that don’t currently qualify, as their income was too high, will now qualify.

For basic rate taxpayers on modest incomes, the effect of tax and national insurance savings as well as extra entitlement to Tax Credits could mean that you could potentially receive up to 67% relief on the purchase of plant and machinery.

For some lucky people, due to the operation of the complicated Tax Credit Income Disregard rule, it may also mean that you get Tax Credits for two extra years instead of one. If this did apply you could potentially receive relief of up to 106% on the purchase of plant and machinery ie. the government refunds you the full cost of the plant and machinery as well as a bit more on top.

It must be stressed that these Added Benefits of Tax Credit Entitlements will not apply to all people. If you are not currently receiving Tax Credits, and you are going to invest in plant and machinery that would then allow you to qualify, it is important that you now submit a protective claim for Tax Credits to preserve your entitlement as a claim cannot be fully backdated at a later date.

If you are considering investing in plant and machinery, and you wish to know how it affects your Tax Credits position, and whether it is in your interest to submit a protective claim for Tax Credits please contact us.