Capital Allowances:
Annual Investment Allowance
Background
Since April 2014 the Annual Investment Allowance (“AIA”) for capital expenditure has been set at £500,000 per annum. This was a temporary measure due to decrease substantially after 31 December 2015. In the Summer Budget however the Chancellor announced that from 1 January 2016 the AIA will be set at £200,000 p.a for all types of business.
The AIA essentially gives a business 100% first year tax relief for expenditure on plant and machinery. If the AIA limit is exceeded then a writing down allowance of 18% or 8% is available on any surplus expenditure on a reducing balance basis. Broadly, groups of companies or companies under common control are only entitled to one AIA between them.
In the transitional period spanning the change in AIA however it is critical to get the timing of capital expenditure correct in order to maximise the relief available.
Accounting periods spanning 31 December 2015
The total AIA available to a business is time apportioned with reference to its accounting period. By way of example a company with 31 March 2016 year end will be entitled to an AIA of £425,000 (9/12 x £500k + 3/12 x £200k).
Any unused AIA for an accounting period cannot be carried forward, and is therefore wasted.
There are however ‘traps’ for the unwary whereby the maximum expenditure which is available for relief is capped at less than the applicable limit for the year, see the examples below for two of these traps:
Example 1
Consider a company with a 31 March 2016 year end which incurs plant and machinery expenditure of £100,000 on 20 January 2016. The expected AIA for the year is £425,000 however due to the transitional rules only £50,000 (£200,00 x 3/12) will qualify for AIA with the balance of £50,000 available for relief at only 18/8%.
If the same company had purchased the asset on 31 December 2015 then the entire £100,000 would qualify for AIA, assuming no other similar purchases had been made.
Example 2
A company with a 30 November 2016 year end is subject to an overall AIA of £225,000 (1/12 x £500k + 11/12 x £200k). If the company purchases £250,000 of plant and machinery on 1 December 2015, only £225,000 will qualify for AIA even though it was purchased before the limit fell to £200,000.
It is essential for a business planning significant capital expenditure to understand these rules and to time the expenditure accordingly. If you are concerned about tax relief on your capital expenditure then please contact our Tax Director, Jenny Marks.
The Summer 2015 Finance Act has not yet received Royal Assent, therefore the rules can still change before becoming law.
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