Annual Investment Allowance and first year of trading as sole trader

Annual Investment Allowance and first year of...

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(I am assuming that the AIA is 100K, and that it has not change by the time you read this)

Assume a sole trader started trading on 5st Sep 2010, and he then spend 100K on capital plant. 
 
As I understand it, the sole trader will be tax on a period of 5st Set 2010 to 5 Apr 2011, so will only get half of the AIA. This means that 50K of the capital investment will not be covered by the AIA. 
 
This does not seem very far because:
  • If the person started trading on the 5th Apr 2010, he would get a full AIA of 100K,
  • Likewise if the person was trading var a LTD he would get a full AIA, as his companies tax year would be 12 months long.
Can the AIA be used in the next tax year to cover the other 50K of investment? 
 
Does the accountancy date of the sole trader effect this in any way? 
 
What am I missing… 
 
(Please make clear if your answer is posted after the 22 June, if it takes into account any changes to the rules…)

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By User deleted
10th Jun 2010 18:05

AIA

Yes AIA is restricted if your accounts are less than 12 months.

This is not so unfair as you imply because if your accounts are 6 months you will only have 6 months income. The 12 months accounts guy will have 12 mpnths income and presumably more taxable income.

Any unused AIA is lost. Next year is another £100,000.

It is unfair if your capital expend is front ended but your income is even or increasing slowly.

Why not go for 12 months accounts? The taxable profit is calculated after CAs and apportioned between tax years in the first years.

 

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By ringi
10th Jun 2010 23:13

Why not go for 12 months accounts?

 

I thoguht that as a sole trader the first trading period had to end on the 5th Apr, or I have misunderstood something?  (I got this from the notes to the sole trader page of the tax return)

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By User deleted
11th Jun 2010 09:32

Its complicated

You do not have to have your accounts made up to 5 April.

It is often simpler to use 5 April and certainly H M Revenue & Customs prefer that date but they cannot insist on it.

The rules for calculating the amount to be taxed in the commencement years are fairly simple and can be found at
http://www.hmrc.gov.uk/manuals/bimmanual/BIM71015.htm

In deciding when to have your yearend you should consider simplicity versus the resulting tax cash flow. For most businesses that have reasonably level investment in assets and income growth, a fair presumption would be that using the 5 April would not be disadvantageous.

But if, as your question implies, you will have heavy upfront asset purchase using the 5 April may not be best for your tax cash flow. There is no substitute for doing the calculations.

If your accounts start on 6 September 2010 you should be able to complete accounts for the 12 months to 5 September 2011 in time for filing your Tax Return to 5 April 2011 online by 31 January 2012. Otherwise you would have to estimate the fraction equivalent to the 7 months to 5 April 2011 to file your Tax Return and then amend it by a repair once the correct figure is known.

If your investment and income stream are likely to be substantial you should get proper professional advice as the tax cash flow impact could be significantly different depending on the accounts end date chosen. Further significant differences could be made if the timing of the investment could be varied. Sometimes a few days difference in the purchase of an asset could make a big difference to the amount of tax paid this year versus future years.

 

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