Don't miss out on IT tax relief
Small businesses are missing out on an opportunity to claim tax relief on their IT purchases, according to a recent survey.
In this year’s Budget, Chancellor Gordon Brown announced that he would extend the scheme which gave 100 per cent capital allowances in the first year for information and communication technology equipment until March 31 2004.
However, Microsoft's small business arm claims that 89 per cent of the small businesses responding to its survey were not aware of the allowance.
The scheme allows small businesses to claim 100 per cent first year allowances on technology investments, which means that capital expenditure can be written off against profits for tax purposes in the year of purchase. Larger companies write them off at the rate of 25 per cent a year.
UKTECH's tax expert Kevin Miller said: "For freelancers who operate outside IR35 the 100 per cent capital allowance on IT hardware and software remains a valuable incentive and anyone planning to invest in more equipment in the near future should make sure they take advantage of this.
"However for those who might be caught by IR35 they can only claim capital allowances that satisfy the narrower Schedule E rules for claiming capital allowances. The Revenue's view is that an allowance can only be claimed where the equipment is necessarily provided for use in performance of the duties of the relevant engagement. That is the service company had to provide the equipment it was not provided just out of choice. For those who are borderline it makes it difficult to know if their investment will attract capital allowances or not."
What it means for freelancers
But there is a dual advantage for some freelancers with this scheme. They share the benefits to small business by being treated advantageously in terms of claiming 100 per cent in the first year - and therefore improving cash flow.
However, there is a lesson to be learnt from Microsoft who is using this survey and the tax break as a marketing tool to encourage small businesses to make an investment in technology equipment. Equally, IT freelancers who sell their services to small businesses should remember to advise their clients that they can claim 100 per cent capital allowances on the costs of purchasing a ready-made web site or development costs - as well as hardware.
The Revenue classifies ICT expenditure as expenditure on computers and associated peripherals, software and the latest generation of web-enabled mobile phones.
More information about the 100 per cent ICT capital allowance is available on the Inland Revenue's website