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For many businesses the prospect of obtaining a 100% tax deduction for the cost of plant and machinery purchased by the business is attractive.

Announcement from the Summer 2015 Budget

The Chancellor announced in the Summer 2015 Budget that the Annual Investment Allowance will be set permanently at £200,000 from 1 January 2016. He has previously said that this would be included in the Autumn Statement, but this earlier announcement provides welcome certainty for businesses.

What is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) provides such deduction to many businesses for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.

The maximum annual amount of the AIA was increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. However it was due to return to £25,000 after this date. George Osborne announced in Budget 2015 that following conversations with business groups this would be addressed in the Autumn Statement and would be set at a much more generous rate.

So, does that mean there is little time pressure on bringing forward capital expenditure plans?

Not necessarily. There are two reasons why you may wish to press ahead with your plans. The first reason is the straightforward point that tax relief is available for the expenditure on an accounting period basis. For example if you have a 30 September year end, expenditure incurred between 1 October 2014 and 30 September 2015 reduces the same period’s tax liability.

The second reason is the effect of moving from a higher to a lower annual amount of AIA. The amount of the AIA from 1 January 2016 is not known but is likely to be considerably less than £500,000.

On the previous occasions where there has been a change in AIA, there have been transitional provisions to calculate the amount AIA in an accounting period which straddles the date of change. If the transitional provisions for the 1 January 2016 are similar to the previous changes, there will be two important elements to the calculations:

  1. A calculation which sets the maximum AIA available to a business in the whole accounting period which straddles 1 January 2016.
  1. A further calculation which limits the maximum AIA relief that will be available for expenditure incurred from 1 January 2016 to the end of that accounting period.

It is the second figure that can catch a business out.

Example

Let us assume the new AIA is £200,000.

A company has a 31 March year end.

The maximum AIA in the accounting period to 31 March 2016 will be:

9 months to 31 Dec 2015 (three quarters of £500,000)                        £375,000

3 months from 1 Jan 2016 (one quarter of £200,000)                           £50,000

Total annual AIA using first calculation                                                    £425.000

This is still a generous figure. However, if expenditure is incurred on or after 1 January to 31 March 2016 the maximum amount of relief for that expenditure will only be £50,000. This is because of the restrictive nature of the second calculation.

Alternatively, the business could defer its expenditure until after 31 March 2016. In the accounting period to 31 March 2017, Annual Investment Allowance will be £200,000. However tax relief will have been deferred for a full year. In tax terms the moral of the tale is for the business to ensure that significant expenditure is incurred before 1 January 2016.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.

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