Small firms to get IT tax break

Spending on capital items will qualify for a 100 per cent tax break from April 2008, up to an annual limit of £50,000, allowing SMEs to consider revamping their IT systems or any other capital investments.

The present system means that 100 per cent allowances are normally available only on certain environmentally friendly equipment, according to David Teale, director of tax at UK accountants and business advisers DTE.

"Otherwise, the current relief for plant and machinery is usually 50 per cent for smaller businesses in the first year after purchase," he said.

"So taking advantage of the 100 per cent relief on spending up to the £50,000 annual limit can add significantly to your bottom line performance, but only from 6 April 2008."

Disappointingly, further changes to the rules are expected for so-called 'integral fixtures' such as air conditioning, central heating and lifts, which are part of the fabric of a building but still qualify for the plant and machinery allowances.

"The rate of allowance for integral fixtures is to be reduced next year from the current 25 per cent annual allowance down to 10 per cent," explained Teale.

"Therefore, reviewing buildings now to see whether a claim could be made for at least one year at the higher rate may be worth doing."

This means that even those companies looking to make their buildings more energy efficient will suffer from the reduced allowance, potentially making it an unviable prospect for SMEs.

"Because the changes to the capital allowances regime have been announced well in advance and involve a consultation process, it is easy for business people and their advisers to put the matter to one side," said Teale.

"In fact, they should be reviewing their investment decisions in the light of these proposals before committing themselves to a course of action which may add to their overall tax bill."

Teale warned that the rules for taking advantage of this tax break are complex, but reckons that the potential benefits involved are well worth it for small businesses.