Tax credits - a fresh opportunity? - May 2008
Following recent changes in tax legislation it has become likely that many taxpayers are going to become eligible to receive tax credits. However, if action is not taken now to enrol into the tax credit system then these credits will be lost.
The tax changes which have occurred apply from 6th April 2008 for sole traders and partners of partnerships and the most relevant aspect is the introduction of a rate of relief of 100% on the first £50,000 of expenditure on plant & machinery used in trade. This is compared with previous rates of a maximum 50% and will have a large impact on future trading taxable profits.
example
Mr Farmer regularly makes profits before capital allowances of £30,000. During the year he purchases a tractor costing £20,000.
First we need to have a look at the 2008/09 gross income limits for being eligible to receive tax credits. The amount of tax credits payable depend on levels of gross income (joint income for couples) as follows:
Limit for tax credits:
- Single Claimant £12,920
- Couple Claimant £17,458
Mr Farmer's tax position is as follows:
| pre 05/04/08 | post 05/04/08 | |
| Rate of Capital Allowance | 50% | 100% (on first £50,000) |
| Trading Profits | £30,000 | £30,000 |
| Less: Capital Allowances | ||
| 50% x £20,000 | £10,000 | |
| 100% x £20,000 | £20,000 | |
| Taxable Profits | £20,000 | £10,000 |
| Not eligible for working tax credits | Eligible for working tax credits |
Due to the impact on profits of the new rates of allowances, Mr Farmer has now potentially become eligible for working tax credits (depending on his other income).
This situation is likely to be typical of many traders and you are advised to seriously consider the impact on your own business and tax position.
Note importantly that claims for tax credits are based on current year income and can only be backdated 3 months and your accounts for the 2008/09 year may be unlikely to be finalised for some time. It is possible to make what is known as a protective claim now on which you will make a best estimate of your current year income. If you think that you might be able to take advantage of this opportunity then we urge you to telephone your usual contact at the Penrith office.
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