Penny Jones explains why now may be a good time to refurbish your practice, before the tax relief is substantially reduced.
When refitting a surgery within your practice you can claim substantial tax relief. However with new limits and allowances effective from the 6 April 2012 **, it will almost certainly be worth considering making purchases before then. The form of relief depends upon the type of cost involved. Income tax relief for the cost of new and second hand equipment (including installation costs) is claimed under the capital allowances rules and they are changing.
The new rules effective from 6 April 2012 ** will see the limit for the Annual Investment Allowance (AIA) tumble from £100,000 to £25,000 per annum. On the same date, the writing down allowance is to be reduced from 20% to 18%, meaning the relief on existing assets or any expenditure in excess of the AIA will be lower than before. The table below compares the relief on a £30,000 outlay now with a similar investment in May 2012, for a business with a 31 March year end. If you are planning to spend in excess of £100,000, you will need to plan ahead so as to spread the cost over two accounting periods, and in the most tax efficient way.
| Outlay in July 2011 |
Relief in 2011-12 tax year |
Outlay in May 2012 |
Relief in 2012-13 tax year |
Relief in 2013-14 tax year |
Relief in 2014-15 tax year |
Relief in 2015-16 and later years continues at 18% until cost written off |
| £30,000 @ 100% |
£30,000 | £25,000 @ 100% |
£25,000 | |||
| balance @ 18% |
£900 | £738 | £605 | |||
| TOTAL RELIEF | £30,000 | £25,900 | £738 | £605 |
** 1 April 2012 for limited companies
The costs of redecorating the surgery would be claimed against trading profits as repairs and renewals to existing features, within your profit and loss account. The costs of making improvements to property are not deductible against income tax, but freeholders will be able to claim relief for enhancement costs against capital gains tax when the property is sold. Typically then, this tax relief crystallises on retirement, although increasingly principals are either selling their properties to a Self Invested Personal Pension (SIPP) or holding onto them post-retirement to yield a rental income, thereby deferring the capital gains tax relief on enhancement costs.
Short life assets increase
The news from the 2011 Budget was not news at all; most had been announced in the Pre Budget Report of the previous autumn. So it was quite exciting to hear something new: the extension of the availability of the so-called short life asset pool from four to eight years. Generous capital allowances at £50,000 and then £100,000 of late have left the short life assets pool in little demand. And at four years, it was only suitable for IT equipment with its short technological life. Eight years, however, is arguably the life of the dental equipment you may be investing in. From April 2012, once we have exhausted the £25,000 AIA, there is now another planning option – to identify assets likely to be sold or scrapped within eight years as ‘short life assets’ and write these down in separate tax pools. The tax relief is not immediate but is achieved when the asset is disposed of within eight years, and a balancing tax allowance claimed to reduce taxable profits of the period.
Whether you are planning to purchase new equipment, are undertaking a surgery refurbishment, or kitting out a brand new practice from scratch, the changes to tax relief are something to which you should give careful thought.
Penny Bowen is a chartered accountant at DBS specialising in taxation for dental professionals.
Read more →
