DIRECTORS’ TAX - 12.11.2012

Double up on capital allowances

You’re replacing some of your office furniture and equipment, it’s in good nick and would be ideal for your office at home. But if the company gives it to you you’ll be hit with a tax bill. Can you reduce or avoid this altogether?

Capital allowances basics

When your company buys equipment, e.g. office furniture, it can claim tax relief through the capital allowances (CAs) system. The cost, up to a set limit, known as the annual investment allowance (AIA), currently £25,000 per year, can be deducted from profits for the accounting period in which the purchase is made. But for expenditure above the AIA the deduction is just 18% per year. Plus, if your company later sells or gives away the equipment, there are more rules to contend with.

Claw back of CAs

Money your company gets from selling equipment reduces the amount on which it can claim CAs. For example, if it bought an oak desk for £2,000 and later sold it for £800, it can only claim CAs of £1,200. If it had already claimed the full £2,000, then £800 would be clawed back and taxed. Where your company gives away equipment a claw back can also apply. It must treat the gift as if it sold the equipment at market value, i.e. the price it would fetch had it been sold, but there are exceptions to this rule.

Gifts to directors and employees

Where your company gives equipment to a director or employee, this counts as a sale, but one where the proceeds are nil. This is good news for your company as it won’t face a claw back of CAs. However, as you might expect, this apparent generosity from the Taxman comes at a price.

Tax charge on gift

While your company won’t lose out on CAs, the gift of equipment counts as a taxable perk for you. Plus, the amount on which you’ll be charged is usually the equipment’s market value. Therefore, in effect, the CAs clawback on your company has simply been converted into a personal tax bill for you.

Doubling up on CAs

The tax position seems pretty fair at this point; using the example of the desk costing £2,000, the company gets CAs on this amount, and when you receive the desk as a perk you’ll pay tax on it at its market value of £800. But this isn’t necessarily the end of the story.

Tip. Assuming you’ll be using the desk in your home office, and therefore essentially for work, the rules allow you to claim CAs against your personal tax bill even though you paid nothing for it. The amount you can claim is equal to the desk’s market value at the time it was given to you. And because, in our example, it’s within the AIA, you get a full £800 deduction for the year in which it was given to you. This cancels out the tax bill on the perk.

Trap. Your company will have to pay Class 1A NI at 13.8% on the gift of the desk. In our example that amounts to £110 (£800 x 13.8%).

Negligible final reckoning

When you stop using the equipment for business, say because you retire or give it away, some of the CAs you’ve claimed can be clawed back. But if this happens to be a good few years later, the chances are the value of the desk will be negligible and so, therefore, will be the claw back of CAs.

Where you use the equipment gifted to you for work purposes you can claim a deduction against your personal tax equal to the market value of the equipment. This will reduce or wipe out the tax bill that was triggered by the gift.

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