Ensure  you make the most of your AIA

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 (AIA) could be a huge benefit to your business.  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

The Finance Bill 2014 will increase 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, in an attempt to stimulate growth in the economy.

Current legislation provides that from 1 January 2016 the Annual Investment Allowance will revert to the £25,000 level that it was prior to 1 January 2013. This is of course subject to change in future Finance Bills.

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.

Also if you run a large company, for Corporation Tax purposes, then remember that the rate of taxation is currently reducing so the company will pay tax at a lower rate in future years. A rare opportunity for a tax saving in real terms!

So how can you make the most of the Annual Investment Allowance for your business? Well, as with most things, timing is 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.

Due to the duration of the incentive the majority of businesses will have a chargeable period which either spans the date of increase, the date of reversion or both. In these circumstances transitional rules apply.

Using a company, paying tax at the small 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 2014, 30 April 2015 and 30 April 2016.

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

Year ended 30 April 2014

The maximum entitlement would be 11 months of the £250,000 limit in force from 1 May 2013 to 31 March 2014 (£229,167) and 1 month of the £500,000 limit from 1 April 2014 (£41,667), giving a total maximum entitlement of £270,834. However no more than a maximum of £250,000 of the company’s actual expenditure between 1 May 2013 and 31 March 2014 would be covered by this entitlement, due to this being the maximum claimable prior to 1 April 2014.

Year ended 30 April 2015

The maximum entitlement would be £500,000 and there is no limit on when the expenditure is incurred during the year.

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 £25,000 limit reverted to from 1 January 2016 (£8,333), giving a total maximum entitlement of £341,666. However no more than £8,333 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 £341,666 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 £8,333 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 £341,666 and an additional £54,667 reduction in its tax liability for 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.