Some of you may be aware that, subject to approval .in the Finance Act, the rules for claiming relief on the purchase of capital items are changing with effect from 6 April 2008.
As things stand when you purchase an item of equipment such as a camera, you can claim for 50% of its value in the year of purchase followed by 25% of the remaining balance in each subsequent year. After 6 April 2008, you will be able to claim the full value of the item purchased up to an 'Annual Investment Allowance' of £50,000. Any balances brought forward from previous years will be claimed at 20% of the remaining balance.
This is all very well, but there is a hidden danger in these changes. Say for example you typically make a profit of £15,000, on which you pay tax of approximately £2700 paid in two instalments of £1350. If you were to spend, say, £10,000, on re-equipping your studio, claiming the 100% allowance in the year of purchase would reduce your taxable profit for that one year below the personal allowance, so all of the payments on account for that year previously paid would be repaid to you once the Return for the year is processed. In the following year, however, your profit would return to it's 'normal' level, so you would have your normal tax bill plus a payment on account for the following year to pay in one go on 31 January, totalling £4050. It would be difficult to budget for this unless you had tucked the previous refund away in a safe place.
So, is there any way to avoid this 'boom and bust'? However you claim for the purchase of capital items the overall tax liability will be the same, but as can be seen above the liability can vary greatly from year to year.
There are two possible ways to avoid this:
1. Don't claim the 100% allowance. Instead you would claim the 20% annual writing down allowance each year thereby evening out your profits and tax bills.
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