by Steve Livingston on August 16, 2010
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When considering purchasing that shiny new MacBook, desk, printer etc (or pretty much any other capital item) for use in your business, you should think about how you can get the best tax result (as well as considering the best model and price).
Purchased computer equipment, furniture and other plant & equipment is not simply deducted from your profits for accounts and tax purposes. Such items are treated as ‘fixed assets’ in your business accounts and depreciated over their useful economic lives e.g. a £600 laptop might be written off against your business profits over say 3 years (at £200 per year). But tax doesn’t necessarily follow this treatment – that would be far too straightforward!
The Capital Allowances tax regime governs the UK tax treatment of fixed assets in order to provide a degree of uniformity given that depreciation policies can differ between different companies.
The good news is that the capital allowances regime has been significantly simplified over the past few years for the majority of UK businesses. Since 2008, the Annual Investment Allowance (AIA) was introduced which allows businesses (except LLPs) to deduct expenditure up to a certain amount each year from taxable profits in Year one ie 100% tax write off immediately against profits.
The AIA originally started at £50,000 per annum, then went up to £100,000 with effect from 1 April 2010 for companies (5 April 2010 for unincorporated businesses) although it has recently been announced that this will decrease to £25,000 from April 2012.
A key tax planning point therefore is to accelerate planned future significant capital expenditure before the capital allowance rates decrease in 2012.
Care needs to be taken in applying these limits in periods where the limit has changed e.g. a business with a 31 December 2010 year end would need to pro-rata the AIA limit given that the allowance changed from £50,000 to £100,000 with effect from 1 April 2010 for companies. The entitlement is broadly £87,500 AIA for a 31 December 2010 year end, however, some nifty legislative drafting ensures that companies that may have already invested the full £50,000 before the 1 April 2010 (as it otherwise would have been permissible pre the Budget announcement) are not unfairly penalised.
Note that cars are not eligible for the AIA – although there is a some simple tax planning available to fund car purchases with significant tax relief, but I’ll leave that for a future post…
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As always the above information is for guidance and educational purposes only and does not constitute professional advice. Please seek professional advice specific to your facts and circumstances (as tax law can be pretty complex and changes fairly frequently!).
by Steve Livingston on July 19, 2010
Having taken the risk and side-stepped the typical job route to become a tech entrepreneur and wealth-creator, its a good job that there are still some tempting UK tax incentives out there to support you.
Here are just 7 tax ideas or tips that you should be thinking about for your start-up:
- Entrepreneur’s Relief – if you hold 5% or more of the shares in your startup for 12 months and work as an officer / director or employee, then when you come to sell the shares your effective tax rate will be just 10% on the gain. This is limited to the first £5m of gain over your lifetime. Sure beats an income tax top rate of 50%! Make sure you take this into account when setting up your company to ensure founders (and key employees) maximise this essential tax relief – theoretically 20 founders / employees could collectively shelter £100m of gain at the 10% tax rate. Conversely, you’d be gutted if you unwittingly held just 4% of the shares!
- R&D tax credits – get rewarded by the tax man for innovating in your sector by claiming this lucrative tax relief. Many entrepreneurs mistakenly believe that this tax incentive relates solely to industries with scientists wearing white lab coats but this couldn’t be further from the truth. This relief applies across industries – I have enjoyed particular success in the tech sector, for example, I v recently secured a £10k tax refund for a tech startup that had been (wrongly) advised by its accountants that it wouldn’t qualify for this relief! Most repayments are processed by HMRC within 30 days of a claim and you only have 2 years to make a claim before you’re time-barred. Don’t leave this cash on the table.
- Enterprise Investment Scheme - angel investors and private individuals are incentivised to invest in (perceived) higher risk investments like early stage start-up companies with tax breaks like the Enterprise Investment Scheme (or EIS as its more commonly called). Now is not the time for the exact detail suffice to say that many tech or digital startups would fall within the qualifying criteria thereby allowing smart investors to reclaim 20% income tax relief subject to certain limits. Just be aware for now that this is out there to tempt investors.
- Temporary National Insurance Holiday – for new businesses there is a recently announced temporary NI holiday for the first 10 employees limited to £5,000 per employee or £50,000 overall. The scheme officially kicks off in September 2010 however there should be relief for businesses started post 22 June 2010. This relief is location specific with most of the South East barred so you need to check qualifying locations. Startups across the North will qualify so now is a good time to start building your team.
- Get paid at mouthwatering tax rates compared to most employees - once you get past the pre-revenue stage and start making profits, shareholders of small companies have the flexibility to structure their remuneration package to optimise take-home pay. Why pay up over 20%, 40% or even 50% income tax and incur huge National Insurance costs on employee salaries when you can pay yourself a combination of a small salary, dividends (and pension contributions) which, if carefully managed, can result in £nil income tax or NI for c£40k of remuneration.
- Get 100% tax relief on your new equipment – so you need to invest in new Macbooks, laptops, servers and other gadgets for your business. You can claim 100% tax writing down allowances (‘Annual Investment Allowance’) against profits on your ‘first’ £100,000 (!) of capital expenditure each year – this will be reduced to £25,000 with effect from 1 April 2012, although this downgrade should not adversely affect the majority of growing tech businesses.
- Patent innovation box - coming soon (allegedly) will be a ‘patent box’ which will allow income or profits on registered patents to attract lower company tax rates of c10% (as opposed to a current lowest corporation tax rate of 21% or 20% from next April 2011). Bad news is that it may not be until 2013 before this new tax break sees the light of day.
If you’d like to discuss how any of these tax incentives could be applied in your business, please drop me a line via the contact page. Happy to discuss.
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