What's new in the world of tax and business? Here we feature advice and information on the latest hot topics. To view our full archive of articles, please click here.
A new limit for the Annual Investment Allowance
1 January 2016 sees the latest change to the Annual Investment Allowance (AIA), with the allowance set to fall from £500,000 to a new permanent level of £200,000. This reduction will undoubtedly have an impact on many businesses and the timing of expenditure will be critical when maximising claims under the AIA.
What is the Annual Investment Allowance?
Part of the capital allowances regime, the Annual Investment Allowance (AIA) enables businesses to deduct the full cost of plant and machinery (excluding cars - see later) from their profits in the year of purchase. It applies to businesses of any size and most business structures, but there are provisions to prevent multiple claiming. Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as long life assets or integral features).
Apart from reducing the amount of tax payable (by up to 45% for additional rate taxpayers), an AIA claim can protect the personal allowance of a taxpayer earning over £100,000 in the initial year of purchase. However, the lowering of profits could have a dramatic effect on an individual's entitlement to claim Tax Credits, so it is important to seek expert advice before taking action.
How much can I claim?
The AIA was temporarily increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. It had been due to fall to £25,000 from 1 January 2016, but in his Summer Budget on 8 July the Chancellor George Osborne announced that the AIA will instead be set at a permanent limit of £200,000 from 1 January 2016.
However, transitional rules will have an impact on the amount businesses can claim, so timing will play a key role in determining how much AIA is available. It is especially important if you are experiencing a need to invest substantial amounts in plant and machinery.
Accounting periods spanning the change
Where an accounting period spans 31 December 2015, the maximum amount of AIA entitlement is calculated on a pro-rata basis. For example, if Company A's accounting period begins on 1 April 2015 and ends on 31 March 2016, approximately three quarters of that period would fall before the date of change (1 January 2016) and approximately one quarter would fall after that date.
Company A will be subject to a transitional AIA maximum, calculated as follows:
Fraction of period
Allowance for full year
01/04/15 to 31/12/15
01/01/16 to 31/03/16
Transitional AIA maximum
Timing expenditure for maximum relief
As demonstrated in the above example, the maximum AIA for expenditure incurred before 1 January 2016 is £425,000. However, where expenditure is incurred on or after 1 January to 31 March 2016, the maximum amount of relief will only be £50,000. Therefore, if you want to gain the maximum benefit of the £500,000 AIA, it may be advisable to purchase plant and machinery before 31 December 2015. If this is not an option, you might want to delay expenditure until after 31 March 2016, when the AIA will be set at £200,000. Note that tax relief will be deferred for a full year.
Another (though drastic) alternative would be to change the accounting period end to 31 December 2015 from 31 March 2016. The purchase in December 2015 would be in an accounting period which does not contain any changes in the AIA maximum. There could, however, be repercussions in terms of additional costs and possible advances of tax liability.
It is important to take a considered approach when planning expenditure. Any spending on plant and machinery should be commercially justifiable - there is no cash flow advantage to be gained by simply buying equipment to save tax.
The capital allowances rules can be complex and it is important to consider the timing of any expenditure you are planning to help maximise the relief available. Please contact us if you would like further information or advice.
- October 2015: Tax and property - important changes ahead
- September 2015: The latest changes to employment law
- August 2015: Creating an employee expenses policy
- July 2015: Sun, sea, sand…and work
- June 2015: Pensions auto-enrolment: are you up-to-date?
- May 2015: Claiming tax relief on refurbishment
- April 2015: New tax year, new rules: changes to business and personal tax
- March 2015: The new Marriage Allowance
- February 2015: Saving tax before the 5 April year end
- January 2015: VAT for digital business
- December 2014: Stamp duty reforms and business rates feature in pre-Election Autumn Statement
- November 2014: Saving tax on seasonal gifts
- October 2014: Social investment tax relief - could you and your community benefit?
- September 2014: Flexible Working Rights
- August 2014: Tax breaks for charitable giving
- July 2014: The sun is shining: let your business grow
- June 2014: Claiming the new NICs Employment Allowance
- May 2014: Tax-efficient estate planning
- April 2014: The New ISA
- March 2014: 2014 Budget Round-up
- February 2014: Could you save tax ahead of the year end?
- January 2014: Contingency planning: is your business prepared?
- December 2013: Seasonal tax advice for your business
- November 2013: Expansion - is your business ready?
- October 2013: Is your business adequately insured?
- September 2013: Charities update: some recent changes
- August 2103: The new flat-rate state pension: winners and losers
- July 2013: An inspector calls… coping with an HMRC investigation
- June 2013: Raising finance for your business
- May 2013: Ten top tips for reducing your tax bill
- April 2013: The new pension auto-enrolment scheme
- April 2013: The new cash basis: 'simpler' income and expenses?
- January 2013: Saving tax ahead of the year end
- November 2012: Child's play? The new rules on child benefit
- October 2012: Real Time Information: are you ready?
- September 2012: Are you up-to-date on pension auto-enrolment?
- May 2012: After the Budget: planning strategies to implement now
- April 2012: Making your business an Olympic success
- January 2012: The 5 April Year End - plan to save tax now
- November 2011: Autumn Statement 2011
- November 2011: Furnished Holiday Lettings
- October 2011: The Agency Workers Directive
- September 2011: Capital Allowances Are Changing: Make Sure You're Prepared
- June 2011: The Bribery Act: What your business needs to know
- May 2011: Don't get caught out by the taxman!