Tax News
October 2008
Welcome to the first edition of our quarterly Tax Newsletter.
Our specific topic this month is the New Annual Investment Allowance and the revision of the writing down allowance available on expenditure on plant and machinery in the past, the cost of which has not yet been fully written off.
Annual Investment Allowance (AIA)
The Annual Investment Allowance was introduced for small enterprises on 6 April 2008 for Sole traders/ Partnerships and 1 April 2008 for Companies.
This allows for the first £50,000 per annum spent on qualifying plant and machinery to be fully written off against the profit of the business.
The AIA will be pro rated for accounting periods that straddle the introduction date. Therefore a sole trader with an accounting period that runs to 31 December each year will be entitled to an AIA of £37,500 for the year ended 31 December 2008. Any expenditure incurred on qualifying plant and machinery between 1 January and 5 April 2008, will qualify for 50% First Year Allowance (FYA) under the regime that existed previously.
Any expenditure in excess of the available AIA will be added to a pool and a Writing Down Allowance (WDA) can be claimed in the normal way.
BEWARE
Companies – Choose accounting date wisely!
The accounting date of a newly incorporated company that starts to trade immediately will default to the end of the month in which trade commences, if no other date is chosen. Therefore the first accounts of a company that incorporates and starts to trade on 20 September 2008, will be prepared for the period 20 September 2008 to 30 September 2009.
A company’s accounting period for corporation tax purposes can be no longer than 12 months. Therefore this accounting period is divided into two, one period being 20 September 2008 to 19 September 2009, the other being 20 September 2009 to 30 September 2009. The AIA for each period is as follows:
20 September 2008 to 19 September 2009 = £50,000
20 September 2009 to 30 September 2009 = £1,507 (11/365 x £50,000)
To maximise the AIA, trading must commence at the start of the month or expenditure must be made within 12 months of starting to trade.
Capital Allowances on Plant and Machinery
The WDA on capital expenditure in the pool will be reduced from 25% to 20% from 6 April 2008 for Sole traders/partnerships and 1 April for Companies. Again for accounting periods that straddle the introduction date, a hybrid rate will be calculated. Therefore a sole trader with an accounting period of 31 December 2008, one quarter of that period would fall before the introduction date, and three quarters would fall after that date. The calculation of the hybrid rate would be:
¼ x 25% |
= 6.25% |
¾ x 20% |
= 15.00% |
Hybrid rate |
= 21.25% |
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