Has anyone heard about the new Annual Investment Allowance? I was looking on a website earlier (specialist accountants for musicians) and came across their newsletter in which they mention this new Annual Investment Allowance that has been introduced. This is the link about it on the HMRC website:

http://www.hmrc.gov.uk/budget2008/bn12.pdf

I'm not sure I'm understanding it correctly because it seems too good to be true. What the specialist accountants say is:

A new allowance is, however, being introduced which will give 100% relief for instruments and equipment purchased each year up to a maximum of £50,000. This new allowance, the Annual Investment Allowance (“AIA”), applies to all businesses regardless of size so will provide opportunities for substantial reductions in tax bills.

One point to bear in mind, however, is that if you purchase an asset in one year and claim the 100% AIA, you will have to pay tax on the sale price if the asset is subsequently sold.


I was already planning on buying a new clarinet soon which will cost £2595. So am I right in thinking that, with my projected annual income being about £3966 and tax estimated at being around £793, that I won't have to pay any tax at all?

If what I've said above is correct then surely you could always find an instrument to spend most of your potential tax on, without it seeming like you're taking advantage. I could easily build up my collection of saxes for example, not to mention my electrical equipment.

Feel free to put me in my place if I've completely misunderstood what it's about.

Lucid

One point to bear in mind, however, is that if you purchase an asset in one year and claim the 100% AIA, you will have to pay tax on the sale price if the asset is subsequently sold.

I wonder what happens if you trade the first instrument in for another?

Who is likely to be affected?
1. Businesses investing in plant and machinery.


Since when has a clarinet been plant or machinery?

Yes well I did wonder when I read that, but when you look down at point 3:

The new AIA will be available to:
• any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office);
• any partnership the consisting only of individuals; and
• any company (subject to the limitations described below).

I thought that it could include us musicians as it's our vocation, and I thought maybe plant or machinery was a general term. The only reason I stumbled upon it was through this specialist music accountant's site, but I guess they could be getting it wrong themselves. I just wondered really if anyone else knew about it and whether it was applicable to us.

Lucid

EDIT: Yes after re-reading it I think I've been really stupid and got it completely wrong. Oh well. I kind of thought that if these music accountants were referring to it in their newsletter that it would be right, but I think mrbouffant's conclusion is much more sensible. It would have been good, but I guess with my tiny profits I probably still won't have to pay much tax this year after buying my new clarinet.

Lucid are you sure you need to pay tax at all? You must be well within personal allowance and you must be exempt from NI or am i missing something?

Yes unfortunately I do have to pay tax because I've got a part time morning job that takes me over the allowance. So everything I earn for being a musician is taxed at 20%. I am exempt from paying Class 2 NI though.

Also I was trying to do some google searching on the AIA and there were people like film-makers (oner example) being told that they could claim relief for buying assets like their cameras with the AIA. So now I'm confused. I suppose the best option is to get advice from an accountant to find out the exact rules on capital allowances, as (even when putting aside the new AIA issue) this is an area I've not dealt with before and I know we can claim something for our new instruments (and existing ones apparently).

Lucid

You could go to this site: http://www.fool.co.uk/

I've known this site for ten years and it was originally started to help people understand their finances and avoid being ripped off. It's a lot more commercial now, but the general ethos is the same.

Then click Discussion Boards and go to 'Ask a Foolish Question' or similar. There are forums that cover just about everything and the people at the Fool are very friendly and helpful.

Steve

I think it's highly likely that you'll be able to claim Allowances for a musical instrument - don't get misled by the "Plant and Machinery" category, it's much broader than it sounds and covers most things that aren't buildings.

What you might be misunderstanding is that the allowance isn't used to offset your tax bill, but is counted as a cost against your taxable income before your tax bill is calculated. The effective cost to you of the instrument ends up as whatever you paid for it multiplied by (1 - tax rate).

Caveat - I'm not an accountant, and my calculations of Capital Allowances tend to be for multi-million pound projects, but I don't see why the principles wouldn't hold.

Thanks for the info Steve, I'll check out the site.

Thanks TSax. Yes I was misunderstanding it. I don't know why as I know full well the business expenses come off of our taxable income. I think I was being lured in by wishful thinking.

So using a basic example (before thinking about all my other expenses) my projected annual income of £3996 would usually result in £793 tax (20%). But after buying the clarinet I would be left with £1401 taxable income and as a result would only have a tax bill of £274.20. So it's a big difference - assuming the AIA will apply to us. I have to say I'd be surprised if these specialist accountants were informing their clients about it without having checked whether it applies first. They have a very useful guide on their site for self employed musicians and all of the information seems to be detailed and correct.

Does anyone know if a set fee of £150 is reasonable for the management of accounts and tax returns when your business profits are less than £5000 a year? I know some people use accountants and say that quite often they save them money. As I'm still relatively new to this I thought it might be an idea to get some help to see if I'm missing anything out - which I'm sure I am. For example I didn't know we could claim capital allowances for existing instruments.

Lucid

Yes, that's the idea - but don't forget that you've spent £2,565 on a clarinet to get the £519 saving on your tax bill. So your profit after tax reduces from £3,203 to £1,126.80 (plus a clarinet).

IANAA Should be, think 'tools of the trade'
Its interesting the 100% allowance thing, presumably previously it was a case of having an asset and then depreciating it over the years (even though it _might_ go up in value)

Yes but unfortunately to even be able to afford the clarinet I'm having to sell my current pair of clarinets, so it won't come out of my profits. Otherwise I wouldn't be able to do it. I'm also having to sell some of my other old instruments to raise funds for our car's MOT, service and tax which are all due this month. Typical timing!

Vectism, yes I think that's right - although this is the area (probably one of many) I lack knowledge in. I believe that before when you bought a new instrument you could claim 40% of the value in the first year and then 25% of the value minus allowances already claimed in subsequent years. This is what it says on this accountant's guide anyway, but it might not be correct.

Lucid

Lucid,

One important thing you should never, ever forget:

Keep all receipts for everything and all details of lessons, sales, bills etc!!!

Steve

Thanks Steve. Fortunately I've got that area covered - I even go to the extent of photocopying all paying in slips and cheques and I'm given before they get paid in.

Lucid

In case anyone's interested I finally received an email reply to my query about the AIA from HMRC (I emailed them in June and got the reply today):



Lucid

I am an accountant and I've written books on tax.
A musical instrument is certainly plant and machinery for a musician. Law books count as plant and machinery for a lawyer.
You can claim for anything, pretty much, that enables you to do your job, that includes maintenance of instruments, sheet music if you use it to directly generate income, eg performing or with students, music stands etc.
You can't claim for anything that "puts you in the position of being about to do your job", so glasses to read the music even if you have to have a special pair just to read music. That is also likely to include music you buy exclusively to hone your musical skills, but if you have any sense you will always be able to find a professional use for sheet music.
Dora

So can I claim for all my oboe reeds? Seems too good to be true!

Yes. Reeds, cleaning cloths, cork grease etc.

Lucid

Blimey. I'd better start keeping the receipts! I'll have to go and read the taxman's form properly to work out where you have to put all this info...

You are likely to be able to claim for anything which is directly linked with your work so certainly all your maintenance costs of an instrument. You can also claim a proportion of your household bills if you either teach at home or undertake administration at home. It is probably better not to claim the exclusive use of a room for work because there are potentially capital gains tax implications. How much can you claim? That is a matter of fact rather than a matter of law. So different people will be able to claim different amounts. But you should be able to charge a proportion of heating, lighting and cleaning your home. The more you work at home the bigger the proportion you are likely to be able to claim. Most people will be able to claim part of the cost of their computer and internet connection.
You can't claim things which put you in the position to do your job so you can't claim the costs of course you go on or exam you take or child care.
That said there are actually special rules about attending courses and if anyone wants to know about them I will willing look them up.
I've been very grateful for the help I've had on the theory forum here and I'm happy to give something back if I can.
Dora

Can I ask you then about including the costs of the CTABRSM course against tax?
I too have a part time job which has all my income tax allowance free pay. Therefore I pay full tax on my modest earnings as a piano teacher.
Having been teaching for 18 months now (and done my one and only tax return and self assessment this year) I was wondering whether the cost of the course could be used to reduce the tax bill for this year and possibly next year (as I have opted to pay by instalments and the last one falls within next year's tax).
If so could you assist on how to submit it?
Many thanks

I need to check this. Give me a couple of days. I will post what I find out here because I guess people will find it interesting.
Dora

Thanks very much for that.
Cheers.

According to ISM guidelines on their sheet about tax allowances, you can claim for tuition to improve an existing skill, but not to develop a new one. So - I claim for my own singing lessons as part of my continuing development (they also include aspects of teaching, though I don't think that is essential for tax purposes), and I claim for my piano lessons to improve my accompanying skills in the singing lessons I give. Not to mention the 40p per mile to get to the lessons.
I would think this would also apply to courses? Over to you Dora!

I have taken advice from a colleague and he believes that you can claim any costs of keeping yourselves up to date provided you are self employed.
You simply add it as a cost in your income statement or on the 3 line calculation you do on your tax return if your turnover is quite low.
I do intend to do some more research on this and will post anything else I find out but thought it might be useful to post this now because of the 30th September self assessment deadline.
Dora

Hi Dora,

That's such good advice re all the tax stuff - thank you for posting it, especially as I too am thinking of doing the ctABRSM course.

I bought a grand piano whilst at Uni about 4 years ago with the intention of using it to teach once I'd finished my degree.. can I now claim depreciation on it?

The whole issue of whether to do 'self' self-assesment or pay the £300.00 (average) fee to an accountant is still playing on my mind... iyho is it worth paying the fee in the hope of saving more on the tax? I'm sure it's dependent on many factors. I work 20 hours a week for a local music service (self-employed) and teach privately for 10 hours at home.

Thanks again!

Re your piano, normally you can claim depreciation if you are self-employed but I'm not sure how it works if you didn't do so at the time - or if you were not self employed at the time.

( If my understanding is correct further equipment you buy now comes under the heading of Annual Investment Allowance - which is the topic of this thread - so worth knowing about).

My accountant cost me £246 last year - I think it's worth it - unless you are confident you have thought of absolutely everything! (an accountant would advise you about the piano issue for instance).

Oh, wow, maggie, please can you PM me the name of your accountant??? Mine cost me double that last year...

Yes will do! - will have a search for a letter head as they moved offices not so long ago.

30th September? I have always done mine by 31st January - has it changed?


Sorry - should have said I do mine on line. Just checked and that's still the case, but apparently there is a new deadline this year for paper submissions, which is 31st October.