Posted by admin - August 20, 2015 8:38 am Annual Investment Allowance – Impact of the Summer Budget 2015

Does your business require a significant investment in plant and machinery in the near future? Are you paying a substantial amount of tax on your profits? Then the Annual Investment Allowance could be a huge benefit to your business.

What is the AIA and what does this mean for you?

The Annual Investment Allowance is effectively a 100% deduction from your taxable profits which applies to qualifying capital expenditure up to a specified annual limit.

The Finance Bill 2014 increased the maximum amount of the Annual Investment Allowance from £250,000 to £500,000, for a twenty one month period commencing on 1 April 2014 for corporation tax and 6 April 2014 for income tax.

The Annual Investment Allowance was set to revert back to £25,000 on 1 January 2016. However, in his Summer Budget on 8 July 2015 George Osborne confirmed that the Annual Investment Allowance would instead be set at a new permanent level of £200,000 from 1 January 2016.

Whilst the benefit from this is ultimately only a deferral of your tax liability, if your business requires an injection of capital assets then you should be looking to take advantage of the cash flow benefit that a reduction in your current tax liability would bring.

So how can you make the most of the Annual Investment Allowance for your business?

Well, as with most things, timing is most certainly key! By knowing what allowances are available and planning your capital expenditure accordingly. you can maximise the benefit of this incentive to your business. There is no rollover of the allowance so if you don’t use it you lose it.

A large number of businesses will have a chargeable period which spans the date of reduction. In these circumstances transitional rules apply.

Using a company, paying tax at the current company rate of 20% and with a year end of 30 April, as an example we get the situation below for the accounting years ended 30 April 2016 and 30 April 2017.

(More detailed transitional rules apply to businesses subject to income tax and companies which are part of a group).

Year ended 30 April 2016

The maximum entitlement would be 8 months of the £500,000 limit in force until 31 December 2015 (£333,333) and, 4 months of the £200,000 limit applicable from 1 January 2016 (£66,667), giving a total maximum entitlement of £400,000. However, no more than £66,667 of the company’s actual expenditure between 1 January 2016 and 30 April 2016 would be covered by this entitlement, due to the transitional rules which apply.

So if this company is due to make £400,000 of qualifying capital expenditure in the year ended 30 April 2016 and the expenditure all takes place after 1 January 2016 the company would be entitled to an Annual Investment Allowance of £66,667 and the remaining expenditure would only receive writing down allowances at the current rate of 18%. However if the company were to incur the same expenditure but prior to 31 December 2015 it would be entitled to its maximum Annual Investment Allowance of £400,000 and an additional £54,667 reduction in its tax liability for the year!

Year ended 30 April 2017

The maximum entitlement would be £200,000 and there is no limit on when the expenditure is incurred during the year.

From this example you can see how timing your capital expenditure can make a big difference to your tax liability.

So if you are looking to invest in plant or machinery for your business why not contact us today to see how we can make the Annual Investment Allowance work for you.