Capital allowances – a few tricky points. By Rebecca Benneyworth

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The new capital allowances regime is now in full swing, but there are a few aspects of the regime which are likely to provoke problems in practice. Here is a guide to some of the more tricky points.

Five little days

The new regime applies to expenditure on or after the relevant day. In corporation tax this is 1 April 2008, in income tax, however, it is 6 April 2008. For sole traders and partnerships there is a risk that these five days will cause confusion (at best) and expensive mistakes at worst.

A sole trader with a financial period ending on 31 March 2008 will commence their new accounting period on 1 April 2008. This will form the basis period for the 2008-09 tax year. However, i...

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02nd Oct 2008 10:24

Pre-trading - naive question
So how did the plant enter the books of the business, if acquired by the owner (presumably in a personal capacity) prior to the business trading ?

Surely the business can now just write a cheque to buy the plant from the owner, thus getting the AIA for this year ... or does it lease it from him ?

"IANAA" ...

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06th Oct 2008 10:50

Answers to a few thoughts
If you make a partial claim then the unused AIA lapses so no you don't get it next year - only £50,000 each year. So just like FYA it then falls into the pool and attracts WDA at whichever rate applies.

On the capital / revenue point, you would still have to be sure that the expenditure wasn't capital of itself. If it is a repair, then the 50% rule triggers it into capital in any event. So you can't just spend less than 50% and claim as revenue if it is an improvement, as this would be capital in any event. For smaller businesses this issue is less of a problem, as if they spend less than their full AIA amount then claiming it as revenue or as AIA gives the same result.

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By Anonymous
06th Oct 2008 09:53

Partial claim
Re the point made on partial claims to AIA and potential to preserve your personal allowance, does this mean that you can carry over the unused portion of AIA. Also, I cant remember if you get AIA every year. So if you carried over say £20k in year 1, does this meant there is an available AIA of £70k in year 2?

Also, re the 50% replacement cost rule, if teh expenditure of integral features is less than 50% can we treat it as revenue?

Just a few Monday morning thoughts...

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02nd Oct 2008 14:30

Integral features = big headaches
I see many problems here when determining the cost of replacing the entire integral system. Eg a business owns a building on which the shop occupies half the ground floor, the remainder used for offices, staff canteen, loos etc. The first floor is used for storage. The lighting in the shop is looking shabby so management decide to replace. There is no improvement element, so you'd think it was straightforward repairs and renewals. But with the new Integral Features rules we need to decide whether this cost exceeds 50% of replacing the entire system. But what is the “system”. The rules state “electrical systems (including lighting systems)”. This suggests lighting is a system in its own right. But why does lighting differ from other electrical systems? I guess it could be because lighting is generally wired on its own circuit. But generally each floor has its own lighting circuit. So is each floor’s lighting circuit a “system” in its own right? I’ve no idea.

Let us suppose we can identify the extent of the system. Did the shop lighting replacement exceed 50% of the entire lighting replacement? We need to know the cost of replacing the entire lighting system. We don’t know the cost so we ask the client. The client says he never intended to replace the whole system so has no idea of the cost. He tells us to ask the electrician. We ask the electrician. He says he was only asked to quote on the shop area, so he never looked at the remainder. We ask how much it would have been – no idea but he could carry out an inspection and work it out, but as he knows there is no actual intention to replace the whole system he doesn’t want to waste his time so wants to charge for the time spent. But the client doesn’t want to pay because he doesn’t want the work doing. Do we send the bill to HMRC? We could estimate, but we are not Quantity Surveyors so how much weight will our guesses carry? So loads of problems for small businesses. But I also see problems for HMRC – how will they police such rules?

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By Anonymous
02nd Oct 2008 09:03

Pre-trading expenditure
Unfortunately new section 38A(4) says you ingore the effect of section 12, so pre-trading expenditure is not treated as incurred on the date of starting to trade. You use the actual date of expenditure instead (subject to the section 5 rules on extended credit and so on).

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01st Oct 2008 18:31

Pre Trading Capital Expenditure
Hi Rebecca, thank you for a thought provoking article.
One point that has arisen on a practical front for me is a client who spent £30k on plant in Jan/Feb of this year but did not start to trade until late April.
Under the old FYA regime the pre trading rule of expenditure being incurred as if on day one was overiden by the FYA rule saying it was the actual date of expenditure that was relevent for determining if FYA was available.
As best I can see this rule has not been incorporated into the AIA legislation, from memory it merely states AIA is available for expenditure incurred in a chargeable period so I assume the normal pre trading rule now treats the expenditure as arising on day 1 of the chargeable period without any reference back to the original date of expenditure thus making AIA available???
Any thoughts as to the validity or not of my assumptions would be greatly appreciated.

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30th Sep 2008 13:29

AIA in first year
Additionally the AIA will only be £50,000 if the year end is 31 March for companies and 5 April for individuals. If you year end is 30 April 2008 and you have spent £50,000 in April 2008 you will only get AIA of about £4,110 the balance just gets added to the pool

Having said that most companies can't claim anything yet as the 2008 version of CT600 is not available for another two weeks. Additionally our tax software cannot cope as yet with AIA.

Finally just for fun I suspect the hybrid rate for WDA will also cause some problems.

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30th Sep 2008 11:28

Do we apportion the £50,000?
I have a small client who purchased £20,000 of equipment on 10th september 2007 and £40,000 on 18th April 2008. The period is the year to 30th April 2008. Can the client claim 50% of the £20,000 and 100% AIA of the £40,000, or do I have to apportion the £50,000 limit?

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29th Sep 2008 16:48

No it is used in the recomputation of the final award
If the income has increased by less than the income disregard, then the increase is disregarded for the purpose of the final award for the year just ended.

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By Anonymous
29th Sep 2008 15:51

AIA & Effect on Tax Credits
Re the tax credits and the £25,000 income increase disregard - doesn't this relate to the timing of the adjustment? I.e. the overpayment being recovered in later years from future awards (rather than an immediately required repayment). So if the trader has lean profits/losses in the future year(s), their income won't be be supplemented by tax credits as the amounts awarded will be reduced/wiped out by the prior year's overpayments? If I understand it correctly..............

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