A good time to invest?
PETER HARRUP of business advisers PKF says that current conditions represent a ‘sweet spot’ during which to invest for growth
It is commonly accepted that the businesses that fare best after a recession are those that continued to invest during the downturn and expand as the economy starts to pick up. This time around there are also a number of compelling tax reasons to start investing now. One might say that we are now in a “sweet spot” for business investment, with long-established tax reliefs not yet withdrawn and new ones coming on stream.
If your growth plans include buying plant and machinery you can invest up to �100,000 in this year and the next and write the full cost off against your profits but after April 2012 the annual investment allowance will reduce to just �25,000 a year.
For larger investments the 20% writing down allowance also continues until April 2012 when it reduces to 18%. The future cuts in Corporation Tax have an impact as well as, if you claim the tax relief now when tax rates are at 28% or 21%, you will save more money than if you claim the relief in 2011/12 when the tax rates will be 27% or 20%.
For small businesses that are not VAT registered or for other businesses for whom VAT is a cost, buying new equipment or making other investments before January 4, 2011 when the 20% rate of VAT starts will also be a quick win. Equally, for certain retailers, scaling up for a big sales drive to consumers before the 20% VAT rate kicks in will make sound business sense.
Where the opportunity to grow your business requires some research and development investment it may be a good idea to start the project now. The coalition Government has already proposed limiting the current R&D tax credit to high tech companies and start-up businesses in the future so you may miss out if you delay.
For business owners it may now be attractive to build up the value retained in your business, rather than drawing the maximum income out and possibly paying tax at an effective rate of 36.1% (for dividends) or higher (for salary/bonus payments).
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With the new � 5m lifetime limit for gains covered by entrepreneurs’ relief, storing up value in your business until it can be sold is increasingly tax-efficient as you should eventually pay only 10% Capital Gains Tax on the retained value.
This could be even more attractive for owners with significant cash investments. With interest rates at a record low and the income generated taxed at up to 50%, lending funds to your business to help it expand might be a better use of the money.
Clearly there are still risks to the economy, but strong businesses that are sure of their market and invest now to grow can reap many rewards.