Annual Investment Allowance (AIA) – a reduction is imminent for purchases of plant and machinery!

The purchase of plant and machinery by a business is regarded as a capital cost for tax purposes and the tax relief for the acquisition of plant and machinery can only be claimed under the capital allowances rules.

Currently, capital allowances are available at a rate 18% or 8% (depending upon the type of asset) on a reducing balance basis. Thus if a business buy a fleet of vans for £100,000, it can claim 18% of the cost in the year of purchase i.e. £18,000, £14,760 ( 18% x (£100,000 - £18,000)) in the following year, £12,103 (18% x (£100,000 - £18,000 - £14,76)) in the year after and so on.

However, the AIA gives 100% relief in the year of purchase for certain purchases, meaning that in the above example, the business could actually write off the cost of the vans in the first year and claim a £100,000 deduction against profits. A very generous deduction, we are sure you will agree.

The current limit for the AIA is £500,000 with any expenditure above this amount being given on a reducing balance basis as above.

 

Example 1

 

Mike Smith Building Contractors (Darlington) Limited has an estimated taxable profit (before capital allowances) of £1m for the year to 31 December 2015.

The business has spent £600,000 on plant and machinery, so far, in the year to 31 December 2015 and has no plans for further expenditure.

The capital allowances available for the year are £518,000 being £500,000 of AIA plus 18% of the remaining £100,000 i.e. £18,000.

Thus the actual taxable profit will be £482,000 (£1m less £518,000).

 

Newsflash

 

However, it is important that you are aware that the AIA will reduce to £200,000 from 1 January 2016, which may impact upon the tax relief available, particularly where a business has an accounting year which overlaps this date.

 

Where a business has a chargeable period which overlaps 1 January 2016 there are transitional rules for calculating the maximum AIA for that period and 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.

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

 

Whilst still a generous annual allowance, any expenditure incurred between 1 January and 31 March 2016 will only qualify for a maximum amount of relief of £50,000.

 

Example 2

 

Martin Scott Joinery has estimated taxable profit (before capital allowances) of £1.3m for the year to 31 March 2016.

The annual investment allowance for this period is £425,000, as above.

The business has not bought any plant and machinery in the accounting period so far but plans to spend £400,000 before the end of the accounting year on plant and machinery.

 

If the business spends the full £400,000 budget prior to 31 December 2015, then it will be able to offset the full expenditure against its profits, reducing the profits to £900k. However, if the business delays this expenditure to after 1 January 2016, the business will only be able to claim a tax deduction of £113,000 in the year to 31 March 2016, reducing the profits to £1.187m.

By spending the monies after 31 December 2015, the business’ capital allowances has reduced by £287,000 and therefore the business has an increased tax charge of £57,400 in the accounting year. It is therefore key to ensure that the date of the expenditure is considered, albeit after the commercial implications of such expenditure has been considered.

Important

It is important to remember that AIA is not available on the purchase of cars. In addition, some business may have to share the AIA allowance with other related businesses.

The key is to take advice in advance of 31 December to ensure that your planned purchase will be given the maximum tax relief.

Speak to one of our tax teams today! For Darlington call Alan Moore or Lee Watson (01325 349700), for Durham call Nicola Bellerby or Lee Watson (0191 3842244) and for York called Alan Moore or Graham Richardson (01904 784400).