Capital Allowances - The New Proposals

Capital Allowances – The New Proposals

The 2007 Budget introduced some substantial changes to the Capital Allowances system of tax reliefs. As a result opticians will need a greater awareness of the opportunities available in order to maximise their tax savings under the new scheme.

Under existing rules when you buy a piece of equipment to use in your practice you cannot normally set the full set of the cost against that year's profits.  Currently, there is an allowance of 50% of the cost of an item of equipment etc in the year of purchase (First Year Allowance) and in subsequent years an allowance of 25% of the balance remaining (Writing Down Allowance).

Annual Investment Allowance (AIA)

From the 6th April 2008 it is proposed that there will be a new investment allowance (Annual Investment Allowance - AIA) such that the first £50,000 spent on equipment in one year by a business will be offset in full against the profits for that year.  This allowance should cover most items of plant and machinery used by an ophthalmic practice, although cars will not be included in this total.  Where the practice spends more than £50,000 in one year the excess will be written off against profits at a rate of 20% or 10% per year on a reducing balance basis.  Moveable equipment will attract the higher 20% rate, and equipment integral to a building (e.g. central heating, air conditioning, lifts etc) the lower rate of 10%.

Unused Annual Investment Allowance from any particular year cannot be carried forward to future years.

Industrial buildings allowance

The capital allowances that are currently available for the cost of industrial buildings will be phased out by 2011.  The rate is currently 4% of cost per year.  This will be reduced to 3% from April 2008, to 2% from April 2009 and then only 1% from April 2010.  No allowances will be due for most buildings from April 2011.

For established ophthalmic businesses upgrading equipment on an occasional basis, this looks like a positive change, accelerating the tax relief available. However, for new practices being established, those opticians purchasing a practice, or existing practices expanding, all of whom may potentially spend well in excess of the £50,000 annual limit, the effect on tax relief could be quite detrimental, slowing the rate at which relief is received.

Obviously for ophthalmic practices the issue of VAT is also an issue as due to 'partial exemption' rules VAT may not be recoverable in full.  With this in mind it will be of greater importance for opticians to consider their purchasing arrangements in advance.  For more information or to discuss in greater detail please telephone Desirie Lea on:

0151 678 7979 or email: specs@moco.co.uk