Annual Investment Allowance: The ups & downs, and the ins & outs of the Budget changes
The increase in the Annual Investment Allowance (AIA) to £500,000 announced in the Budget will bring lower tax bills for many businesses. The basic idea is simple: AIAs give businesses a 100% deduction from taxable profits for expenditure on machinery, equipment and plant. But the ever-changing AIA limit means that it can be hard to work out exactly how much businesses are entitled to.
The AIA limits including the recent changes are:
6 April 2012 – 31 December 2012 – £25,000
1 January 2013 to 31 March 2014 (*) – £250,000
1 April 2014 (*) to 31 December 2015 – £500,000
1 January 2016 onwards – £25,000
(*) For sole traders, partnerships and LLPs, the changeover date sare 5/6 April 2014. limited companies.
But the actual AIAs claimable by a business will depend on its year-end date. For example, for a business with a 31 March year-end, the allowances are:
2013/14 – £250,000
2014/15 – £500,000
2015/16 – £381,250
2016/17 – £25,000
And there is a hidden trap in 2015/16. Although the total AIA for the year is £381,250, expenditure between 1 January and 5 April 2016 attracts AIA of just £6,250.
For a business with a 31 December year-end, the allowances are:
31 December 2013 – £250,000
31 December 2014 – £437,500
31 December 2015 – £500,000
31 December 2016 – £25,000
Again, there is a twist. In the year ended 31 December 2014, although the limit for the whole year is £437,500, the AIA is capped at £250,000 for expenditure between 1 January and 31 March 2014.
When deciding whether an item of expenditure falls before or after the cut off dates, dates above, you normally have to look at the invoice date, rather than the date of ordering or date of payment. Assets bought on HP attract allowances on the full purchase price, but the asset must be brought into use by the year-end in order to qualify.
- Make sure you know the AIA limit that applies to your business – check with us if your year end is not 31 March or 31 December;
- Plan the timing of CapEx so as to maximise the AIA claim;
- Remember that expenditure on buildings does not qualify unless it comprises plant, such as electrical installations. Ensure any such expenditure can be identified and allowances claimed.
- When financing machinery on HP, ensure it is fully commissioned and in use by the year end date.