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Capital allowances simplified

By Adrian Huston

Last week I set out what I believed were the most dramatic aspects of the Budget. Today I will cover a few more areas which will be of interest to readers, especially those in their own businesses.

Capital allowances are changing. This is a way the Chancellor can deliver quite quick tax relief to businesses, and also encourage them to keep spending money on equipment.

For this reason most Budgets these last few years have seen capital allowances being messed about. This keeps accountants on their toes, but is very confusing for those in business.

From April 2008 you have been able to claim 100% capital allowances on purchases of equipment (but not cars) up to a total of £50,000 in one year.

This does not, of course, mean the thing costs you nothing. It means you get that spending fully treated as an expense in the year you bought the asset. So if you pay 40% tax you could save £400 on a £1,000 computer.

The £50,000 per year still applies from April 2009. What changes only affects equipment and plant bought taking the expenditure for the year beyond £50,000.

For the excess there is a 40% first year allowance. The remaining balance (being 60%) would then get allowed for tax each year at 20% per year on a reducing balance.

Capital Allowances for cars are also changing, as a result of last year’s Budget. It will now depend on the CO2 emissions of the car.

Cars with heavy emissions figures will generate slow tax relief. More efficient cars will result in tax relief quicker.

Buying a new car with CO2 levels 110g/km or less will entitle the business to claim 100% of the cost in year one.

Buying any car after April 6, 2009 (April 1 for companies) where the level is 111-160g/km then the relief will be given at 20% per year. If you buy a car over 160g/km then the tax relief rate is halved to 10% per year.

Corporation tax for companies with profits below £300,000 was to rise in April 2009. It was to go up from 21% to 22%. This rise has been delayed until April 2010.

Companies making losses who recently made profits can now carry the losses back to the profitable period, and thus generate tax refunds.

The accounting period must end between November 24, 2008 and November 23, 2010. Any amount of losses can be carried back to the previous year.

However up to £50,000 of losses can also be carried back to the previous two years. This means tax refunds for up to three accounting years might be available. Claiming loss relief and getting the maximum benefit from your losses is a tricky area. Ask your accountant to have a careful look at what’s best for you.

Sole traders and partners can avail of a similar loss relief and claim to carry back a loss when they submit their self assessment return for 2008/09 or 2009/10.

Furnished holiday lettings in the UK have long enjoyed a favourable tax treatment. This included the ability to set losses against your general income. Since this was a generous tax relief the criteria for getting it were quite tricky to meet.

This special treatment was always only for ‘Furnished Holiday Lettings’ in the UK. I could never understand why only the UK. That restriction has now been found to be contrary to European law — discriminatory. So in a temporary climb-down the government will allow the tests (and special treatment) to be applied to such lettings anywhere in the European Economic Area (EEA).

The sting in the tail is that the special relief will be denied absolutely from April 6, 2010. So 2009/10 is the last year that the term ‘Furnished Holiday Lettings’ will have any importance.

Loads of people never understood how Furnished holiday lettings worked, and soon it will be history!

Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — or 028 9080 6080

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