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Hello Sir
can you please explain me the central idea of the following paragraph?A company must normally claim capital allowances on its tax return. A company with losses should consider claiming less than the maximum amount of capital allowances available. This will result in a higher tax written down value to carry forward and therefore higher capital allowances in future years.
Reducing capital allowances in the current period reduces the loss available for relief against total profits. As this relief, if claimed, must be claimed for all of a loss available, a reduced capital allowance claim could be advantageous where all of a loss would be relieved at a lower tax rate in the current (or previous) period than the effective rate of relief for capital allowances will be in future periods.
Thanks in advanceHi, firstly my apologies for delay in reply but I am fortunate enough to be on holiday at the moment and have only had intermittent access to internet.
The central point being made is that the levels of capital allowance (CA) available, 100%FYA, 18%/8& WDA and AIA of £25,000 are maximum amounts that either a company or an unincorporated trader may claim so if either wishes to make a reduced claim for any reason they may do so. If a reduced claim is made then the tax WDV’s to carry forward will be higher allowing larger WDA’s in future periods.
Situations where this may be recommended would include:
As mentioned in your note a company claiming loss relief in either the current or preceding accounting period must set off the loss in full against Total Profits – partial claims are not allowed. This may therefore result in the wasting of qualifying charitable donations as there may then be no Total Profits from which to deduct them. This problem may be avoided by restricting the CA claim so as to reduce the amount of trading loss, such that the loss relief claim will then leave sufficient Total Profits to cover the qualifying charitable donations.
An unincorporated trader may restrict their CA claim to ensure that on the Income Tax Computation there is sufficient Net Income to cover the Personal Allowance, which again if not used for a tax year is wasted.
The point being made in your note about tax rates would be relevant if the company was small in the current period but was expecting to be marginal in the next period and hence CA’s would then save tax at the marginal rate rather than the small profits rate, or if an unincorporated trader is only a basic rate taxpayer this year but will be a higher rate taxpayer next year.
Hope this helps!
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