Change To Annual Investment Allowance

You may recall that I wrote about this topic last year when we were just beginning to see the first signs of summer and here I am, writing about it again, as we wave goodbye to summer for another year (although as I write this there is beautiful blue sky outside so who knows, maybe it will carry on for a few weeks yet!)

My article last year covered the announcement in the Spring Budget of 2014 that the Annual Investment Allowance (AIA) was being doubled to £500,000 per annum.  At that time I mentioned that it was due to revert to £25,000 per annum with effect from 1 January 2016 but that this was dependent on future budget announcements and a possible change in Government between then and now.

Well, there was indeed a change of Government and there was also a welcome announcement concerning the AIA in George Osborne’s most recent Summer Budget.  Many commentators predicted that the AIA would not revert back to £25,000 and anticipated that it would be set at a higher level and they were proved right when the Chancellor announced that the AIA would be set at a permanent level of £200,000 per annum from 1 January 2016 onwards.

As a recap, the AIA was first introduced back in 2008 to enable businesses to claim 100% tax relief (Capital Allowances) on qualifying capital expenditure which includes most items of plant, machinery and equipment etc.  The level of the AIA has fluctuated more in recent years than the CO2 emission readings on a well known brand of car! It started at £50,000 in 2008, increasing to £100,000, subsequently decreasing to £25,000 before increasing ten-fold to £250,000 and then doubling to £500,000 in April 2014.

With that increase to £500,000 it has meant that the vast majority of small and medium sized businesses have been able to claim tax relief in full on all of their expenditure on qualifying assets in a typical accounting year.  However, for industries where high capital expenditure is common, e.g. manufacturing and farming etc, the permanent increase to £200,000 may initially mean some businesses lose out when compared to the £500,000 limit but it is certainly a lot better than £25,000 and does provide more certainty for businesses going forward which has to be a good thing.

As ever when there is a change in the level of AIA (and in particular a reduction), there are potential traps to watch out for as far as the timing of any capital expenditure is concerned.  This is probably best illustrated by way of an example:

Consider a manufacturing business with an accounting year end of 31 March 2016 that decides to invest in a new production line system which costs £200,000.  The business has sufficient cash reserves to purchase the equipment outright but the owners decide to wait until the new year to purchase the equipment but want it to fall within their accounts for the year ended 31 March 2016.  The maximum AIA available to the business for that year will be £425,000 calculated as follows:

1  April 2015 to31 Dec 2015   £500,000x 9/12              £ 375,000

1  Jan 2016 to31 Mar 2016      £200,000x 3/12             £ 50,000

                                                                                      £425,000

However, the business owners will have a nasty shock if they do wait until after 31 December 2015 to purchase this equipment as the maximum AIA available for expenditure incurred after 31 December 2015 is capped at the apportioned AIA for the period after 31 December 2015 i.e. £50,000 in this example, so they will be losing out on AIA of £150,000 (although they would be able to claim a ‘writing down allowance’ on the balance of £150,000 but only at a rate of 18% per annum).  If they purchase the equipment in December 2015 they should obtain tax relief on the full cost of £200,000 since it is well within the overall limit for the period of £425,000.

Business owners (the same rules apply to sole traders, partnerships and limited companies) will therefore appreciate that timing can be everything where AIA is concerned in the coming months and as a general rule, if significant expenditure on qualifying plant and machinery is anticipated in the next few months, it will most likely be better to incur this expenditure before the end of the calendar year.  Businesses will however have to consider their particular circumstances carefully on a case by case basis and we would be happy to provide specific advice so please contact us to discuss this further if it is relevant to you.

The above is for general guidance only and no action should be taken without obtaining specific advice