Doubling Of Annual Investment Allowance

In a measure designed to stimulate business investment in the economy, it was announced in this year’s Budget that the Annual Investment Allowance (AIA) was to be doubled from £250,000 to £500,000. The AIA was first introduced back in 2008 to enable businesses to claim 100% tax relief on qualifying capital expenditure which includes most items of plant, machinery and equipment etc.  The AIA has undergone various changes in level since 2008 ranging from £50,000 upon its introduction, increasing to £100,000, subsequently decreasing to £25,000 before increasing ten-fold to £250,000 with effect from 1 January 2013.

With the previous increase to £250,000 it has meant that most businesses are now able to fully relieve 100% of expenditure on qualifying assets but for industries where high capital expenditure is common, e.g. manufacturing and farming etc, the increase to £500,000 is potentially very important and could lead to further significant tax savings in the next 18 months or so.

The increase to £500,000 has effect from 1 April 2014 for Corporation Tax purposes and 6 April 2014 for Income Tax purposes.  Broadly speaking therefore, if expenditure is incurred after this date then the business should be able to make use of the increased allowance.

The difficulty comes where the accounting period of a business straddles this date of change or even the previous date of change (1 January 2013) as well.  The maximum AIA for an accounting period which straddles either or both of these dates is calculated by aggregating the AIAs available for each period before and after the change.  However, to account for the increase in the AIA to £500,000 per annum with effect from 1 April 2014 (assuming a limited company), the maximum AIA for expenditure incurred before 1 April 2014 is calculated as if the increase to £500,000 never took place.  This is probably best shown by way of an example: Consider a limited company with an accounting reference date of 31 December.  For the year ended 31 December 2014 that company’s maximum AIA would be £437,500 calculated as:

1 January 2014
to 31 March 2014
£250,000 x 3/12 62,500 £
1 April 2014
to 1 Dec 2014
£500,000 x 9/12 375,000 £
    437,500 £

It is important to note that £437,500 is the maximum allowance that can be claimed and that the limit for expenditure incurred in the period 1 January 2014 to 31 March 2014 is £250,000.  If, for example, £300,000 was incurred on qualifying expenditure in that three month period then only £250,000 would qualify for 100% tax relief. The balance of the AIA available for expenditure incurred after 31 March 2014 is then calculated by deducting from £437,500 the amount of AIA claimed in the period 1 January 2014 to 31 March 2014 (so in this example £187,500 would be the maximum claim available for the later period). 

There is also a further straddling period at the end of 2015 since, after 31 December 2015, the AIA limit is due to revert back to £25,000.  This may of course change between now and then depending on future budgets (and indeed a possible change of Government by this time next year).  However, if the rules do remain as they are then businesses will almost certainly want to plan ahead of that date since for any qualifying expenditure incurred on or after 1 January 2016 the maximum allowance will be restricted to the relevant proportion of £25,000 (depending on the accounting reference date) rather than by reference to the possibly much more significant AIA for the whole accounting period in question. 

If your business is considering significant capital expenditure within the next year or 18 months then you will almost certainly be better off by making sure this expenditure is incurred before 31 December 2015.

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