The Chancellor announced in the Summer 2015 Budget that the Annual Investment Allowance (AIA) will be set permanently at £200,000 from 1 January 2016. George Osbourne had previously said that this would be included in the Autumn Statement, but this early announcement provides welcome certainty for care home operators across the UK who are considering funding new developments or refurbishing existing homes.
Could AIA provide a generous tax saving on the cost of refurbishing homes?
The AIA provides a 100% deduction for the cost of fixtures/fittings as well as most plant and machinery purchased by care operators, up to an annual limit and is available to all businesses. This is certainly an attractive prospect for care home operators, particularly as items such as lighting, electrical systems, cold water systems and lifts may all now qualify for AIA – reducing your tax bills!
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 reduce to £25,000 after this date. Instead, the announcement was that the level of the maximum AIA will now be set permanently at £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
Where your chargeable period spans 1 January 2016 there are transitional rules for calculating the maximum AIA for that period which operate as on previous occasions when the AIA has dropped. There will be two important elements to the calculations:
- A calculation which sets the maximum AIA available to a business in an accounting period which straddles 1 January 2016
- 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 could catch you out, as demonstrated by the following example. If a company has a 31 March year end then the maximum AIA in the accounting periods to 31 March 2016 will be:
|9 months to December 2015 three quarters of £500,000||£375,000|
|3 months from January 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 between 1 January and 31 March 2016 the maximum amount of relief for 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, AIA will be £200,000. However, tax relief will have been deferred for a full year.
With the significant costs involved in refurbishing homes and funding new redevelopments in the care sector, this announcement could provide welcome relief to operators throughout the UK.
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