Capital Allowances and personal tax planning

There has been a big change to the amount small businesses can claim for tax purposes when they invest in capital items such as plant and machinery (these are known as capital allowances).

From the 6 April 2008 sole traders and partners can claim up to £50,000 a year as a direct write off against their profits if they invest in certain qualifying assets; plant and equipment, vans and so on. Small and medium sized companies can also claim (from 1 April 2008). This article alerts individuals claiming the allowance of two other matters they should consider before making a claim.

First the good news!

Tax credits

If the claim you make reduces your income sufficiently you may be eligible for tax credits.

The problem is that until the current tax year’s earnings are quantified, you will not know for certain that you are eligible to claim – a pity as you can only back date claims for three months!

The solution may be to make a protective tax credit claim now. Your initial claim can show £nil but when adjusted for your actual post AIA claim the actual claim achieved may be much higher.

(While we are on the topic, you might like to know that you can also reduce your income for tax credit purposes by paying pension contributions)

And now the bad news!

Mortgage applications

Many lenders now ask for taxable income rather than trading profits when they consider if you are eligible for a loan. If your trading profits of £50,000 are covered by an AIA claim of £50,000, zero income is not going to qualify for much of a loan. Hopefully lenders will take into account the reason for the dip in your taxable income – but some may not! You might expect the request for information from a bank or building society to be consistent and informed, however in practice the requests vary widely and often appear to ask non senseical questions.

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