Staying ahead of the tax game - Veterinary Practice
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InFocus

Staying ahead of the tax game

MARILYN MARTIN
discusses a number of ways in which
veterinary surgeons can minimise their
tax bills and urges them to think long
term and to take expert advice

IN difficult financial times, the key to maintaining profitability is to ensure that your practice stays ahead of the game and makes the most of opportunities that come along rather than simply cutting back on costs. Buying new machinery and equipment may not seem like a good idea right now. However, if replacements will be required soon anyway and your supplier is happy to give you a good deal, buying while 100% first-year capital allowances are available on up to £100,000 worth of plant and machinery could prove to be very cost-effective long-term investment.

Accounting period

The annual investment allowance (AIA) limit is due to fall from
£100,000 per year to £25,000 per year from April 2012 so it is important to consider your practice’s accounting period. For example, if your accounts run on a calendar year, you may be able invest up to £100,000 in new machinery in the next few months and further amounts in 2012. In this case, the 2012 accounting period spans the date of the decrease in AIA so the old limit will apply to the portion of the year running up to the change and the new limit will apply to the remaining portion of the account year. Therefore, the allowance for 2012 would be £43,750 (i.e. £100,000 x 3/12 plus £25,000 x 9/12). However, for expenditure incurred in the nine month period from 1st April 2012 to 31st December 2012, the AIA limit is only £18,750 (i.e.
£25,000 x 9/12). Therefore, if you are thinking of buying assets
qualifying for AIA, you should consider the purchase date carefully to maximise the allowances that can be claimed to reduce your taxable profit. Beyond the AIA limits, the cost of new machinery is claimed at 20% of the reducing balance each year (reducing to 18% from April 2012) which means that tax deductions are spread over a long period. However, for machinery and equipment that has a limited lifespan, it has always been possible to opt for them to be regarded as “short life assets” (SLAs) – effectively bringing forward the tax relief available – if they would have an expected useful life of four years or less. With effect from April 2011, newly bought assets can be treated as SLAs if they are expected to be worn out within eight years. In the past, SLA claims have generally focused on IT equipment as this has a short life expectancy but the new time limits mean that a much larger range of assets can be treated as SLAs: for example, white goods, furniture or industrial equipment with a short life span. The benefit of treating assets as SLA is that if they are sold or scrapped within eight years, a balancing allowance ensures that capital allowances can be claimed in full on the net cost of the asset to the business. Therefore, designating assets as SLAs can have a significant cashflow benefit to many practices.

Vehicle considerations

Practices operating through companies should also think very carefully about any vehicles provided to senior staff. New registration vehicles are available from 1st September but it is important to check out increased tax costs on CO2 emissions for future years when selecting a vehicle. The ever-changing regulations concerning vehicle benefit-in-kind charges can mean a company car picked now could end up considerably more expensive by the time it is due to be renewed. For example, compare a Golf S TDI 105ps costing £18,375 with CO2 emissions of 119g/km with a Golf Bluemotion 1.6 TDI costing £19,195 with emissions of only 99g/km. The tax cost for the full 2011-12 tax year for the Golf S is £42.60 less than for the Bluemotion for a 40% taxpayer but, by 2013-14, the annual tax cost will be £248 more. Petrol cars with emissions under 75g/km have a 5% scale charge whilst a car with emissions of less than 100g/km would not only retain a low tax charge but would also entitle the employer to claim 100% first-year capital allowance if they were to purchase the vehicle. Electric cars have no scale charge under the current rules (i.e. until April 2015). For those at the other end of the market, it should also be remembered that there is now no £80,000 cap on the list price of a company car, so a £120,000 Bentley Continental will now have a benefit charge of £42,000 instead of the previous £28,000.

Pension rules

Although company car selection is becoming more complex, the rules on pension contributions are now rather more straightforward. Individuals (or employers on their behalf) can contribute up to £50,000 each year without triggering tax clawbacks and individuals can claim tax relief at their highest rate on their contribution. In addition, where payments in the past three years have been less than this limit, any excess of the allowance can be carried forward and used in the current year. This facility could prove useful to partners in a practice having a good year in 2011-12 as they may be able to increase their pension contribution to ensure that they do not fall into the 50% tax bracket or to keep their income below £100,000 so that they
do not lose the benefit of their personal tax allowances.

More control

Vets operating through a company have rather more direct control over the amount of their profit that is taxed on them as individuals as they need not extract all their profits as salary or dividends. Again, pension contributions can be tax efficient: if made by the company direct, it can claim tax relief and the profits are effectively diverted into the owners’ pension funds without suffering any tax charge. There are many other straightforward ways for vets to minimise their tax bills for the future but, in general, the key to saving money is to think long term and consider as many issues as possible with advice from experts.

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