Knowledge bank

With constant news about the deteriorating economy, isn’t it time you got a little help with your cash flow. Rachel Lamb, technical tax manager for Cumbrian-based accountants Dodd & Co, considers how to maximise tax benefits to help you in the current downturn.

Tax credits are payments from the government. If you can answer 'yes' to either of the following questions you could be eligible to receive some tax credits:

1. Are you responsible for at least one child or young person who normally lives with you?  If so, you could qualify for child tax credit.

2. Are you aged over 25 and working at least 30 hours per week? If you earn low wages, you may qualify for working tax credit.

Given the current economic climate with people facing possible redundancies, reduced working hours and the self-employed incurring bad debts, it is worthwhile checking to see if you could be due some tax credits to help your cash flow.

The amount of tax credits you receive depends on your circumstances but the following are taken into account:

• how many children you have living with you
• whether you work and if so the hours worked
• if you pay childcare costs
• if you or any child living with you has a disability
• if you are aged over 50 and are returning to work after claiming out-of-work benefits
• your annual household income

A claim for tax credits can be made at any time and if you are eligible payments will be backdated for three months so the sooner you apply the sooner you will receive your payments.

Working tax credits are available to the employed and self-employed. For the self-employed, you may think that your income has been too high in the past for you to be eligible. However, due to the interaction with the new capital allowances regime for purchases of equipment to be used in your business, you may now qualify even if you haven't previously. So if you expect reduced business profits for the current or previous tax year or you have spent significant amounts on new equipment now is the time to make the claim. It is possible to make a protective tax credits claim if you believe that your income has dropped so that payments will be backdated to the start of the tax year rather than waiting until your financial accounts are prepared to apply.

A new regime for capital allowances began in April 2008. In some circumstances this could mean that the Revenue could help you to buy some new equipment for your business and pay you more tax credits. The new Annual Investment Allowance (AIA) enables businesses to claim the full cost of most new capital assets against their profits.  Businesses can spend a maximum of £100,000 per annum (recently increased from £50,000 in April 2010) to qualify for full tax relief in the year of expenditure. Combine the interaction of the tax relief with a claim for tax credits and see how much the new capital items have cost you! 

Example

A business with a year end of 5 April 2010 buys a new van for £20,000. This is less than the maximum allowed under the AIA so the full cost of the van is deducted from the business profits.

The tax credits in this example are based upon a family with 2 children and income of £30,000 before the purchase of the new van.

So a tax refund of £800 could be achieved together with a free van!

**(The tax credits paid in 2010/11 are higher because an increase in income of up to £25,000 is ignored for tax credits purposes).

If you would like to discuss any aspect of making a tax credits claim, or you would like to know how the Annual Investment Allowance can benefit your business, please contact Rachel Lamb on 01768 864466. 

Rachel Lamb

Rachel Lamb, technical tax manager for Cumbrian-based accountants Dodd & Co.

First published: a-n.co.uk October 2010