Business and personal tax overlaps.
If you manage a small or medium-sized business you will be aware of the value of tax reliefs such as the Capital Allowances system, which allows you to progressively write off the value of your equipment or machinery investments against your profits, year by year.
The Annual Investment Allowance is a tweak to the Capital Allowances system which took effect in April this year. Before then, small companies could deduct 50% of their so-called “qualifying expenditure” on plant and machinery from their taxable profits. Medium-sized companies could deduct 40%. As of April this year, both rates were replaced by a single Annual Investment Allowance of 100% – i.e. the equivalent of the whole of the qualifying expenditure in the relevant accounting period, up to a capped limit of £500,000.
This sounds wonderful for the business (provided your expenditure on the equipment doesn’t usually exceed 140% or 150% of the new value cap), but what about your own personal income? Obviously, any business relief that reduces the taxable profits of the business also has a knock-on effect on the profits you can withdraw from it cost-effectively. And with the raising of this particular capital allowance relief to 100%, even a modest equipment investment can significantly drive down your taxable profits. So that may leave you with a low enough income, in a year when you have invested in equipment, to make a claim for tax credits worthwhile for just that one year.
Part of the challenge of tax accountancy is taking a holistic view of the client’s affairs, and joining up the various fields of tax to spot the opportunities available to the client. But it never does any harm to ask a pertinent question. It may be worth checking your terms of engagement with your accountant and discovering exactly what fields he/she advises you in. Some accountants specifically exclude tax credit advice from their services, for example (it is notoriously difficult to deal with the tax credit office on a third person basis even if you are the registered agent of the claimant). Others may understandably be disinclined to tackle such a complex system and run up a large fee invoice for you in the process without a specific instruction from you. As usual, if in doubt, ask.