Capitalise on capital allowance

Community pharmacy tax bills can be significantly reduced by claiming capital allowance on any assets purchased.

The level of capital allowance that can be claimed will change in April, and as a result, pharmacy proprietors might wish to reconsider when they purchase their assets to ensure that they get the best tax deal.

At the moment, under current regulations, during the financial year in which an asset is purchased, small and medium enterprises (SMEs — see below) can claim tax relief on 50 per cent of the cost of the asset. This is known as the first year allowance.

During subsequent years, the business can claim tax relief on 25 per cent of the balance of the asset’s purchase cost that remained at the end of the previous year. This allowance is sometimes referred to as the “writing down allowance” (WDA).

New regulations

From April 2008 (1 April for companies, 6 April for sole traders and partnerships), the first year allowance will be abolished. In its place, SMEs will be entitled to claim tax relief on all of the first £50,000 spent on eligible assets. This will be known as the annual investment allowance.

The assets that constitute the first £50,000 spent will be determined according to the date of invoice or the date of contract (if the asset requires contracted work to be undertaken).

For businesses whose financial year ends on 31 December, the current and new regulations will apply before and after 1 April, respectively (see Panel 1, below).

Each business operating as a sole trader will be allowed one such allowance for each sole trade activity they perform. Therefore, if a sole trader who runs a pharmacy also performs a commercial activity that is independent from the pharmacy (eg, holiday letting), the sole trader would be allowed a £50,000 allowance for each activity.

However, a business that operates as a “company” will usually receive only one allowance irrespective of the number of commercial activities it performs.

Pharmacy proprietors should check with their accountant if they are unsure about the allowance that they will be entitled to.

If the total expenditure on assets is above £50,000, this additional spending will be eligible for WDA (as per the current regulations), at a rate that is determined according to the category the asset falls into. These categories are:

• Assets that are used to deliver a service — 20 per cent
• Integral features of the building — 10 per cent
• Long life assets — 10 per cent

Assets that are used to deliver a service include fixture and fittings (eg, shelves, dispensary furniture), and plant and machinery (eg, computer systems, tills).

Integral features are assets that are part of the building but not specific to the service that is delivered (eg, central heating systems, air conditioning units).

Long life assets are those that cost more than £100,000 and are expected to be used for more than 25 years.

An example of a long life asset that might be purchased for a community pharmacy is a dispensing robot.

Assets bought in previous years that qualify for WDA under current regulations will remain eligible, although the rate will reduce from 25 per cent to 20 per cent.

What happens under current regulations

An example of how WDA is calculated under current regulations is shown in Panel 2. Most assets are eligible for first year allowance, although there are some exceptions. These include:

• Long life assets Business owners can claim WDA of 6 per cent of the cost of the asset during the year of purchase, and 6 per cent of the remaining balance during every subsequent year.

• Cars A business that has purchased a car that costs more than £12,000 cannot claim tax relief on the purchase of more than £3,000 per year. This limit is reduced further if a sole trader is also using the car for non-business purposes.

• Environmentally friendly cars A business that purchases a car that is electric or has low carbon emissions can claim tax relief on the full cost of the purchase.

Consequences of new regulations

The new regulation will result in a change in accounting practices for community pharmacies compared with previous years. From April 2008, pharmacy owners will need to provide their accountants with information on the nature and use of each asset, in order for the tax to be calculated correctly.

All assets bought before April 2008 (with the exception of long life assets) will qualify for WDA at a rate of 20 per cent, so will not need to be classified.

An example of the effect of the new regulations is shown in Panel 3. However, depending on the cost of the asset and the date on which the business’s financial year ends, it may be more tax efficient to purchase some assets before April.

Pharmacy proprietors should seek advice from an accountant regarding the optimal timing for purchasing all assets during 2008.

The final decision on these regulations will be announced by Chancellor of the Exchequer Alastair Darling during his budget speech on 12 March. This will also include a decision regarding whether to retain the current 100 per cent first year allowance on environmentally friendly cars.