Reduced Annual Investment Allowance (AIA) - check the calculation
The AIA, which allows a 100% tax deduction in the year of expenditure for qualifying expenditure on plant and machinery, such as a tractor, reduces from the current level of £500,000 to £200,000 from 1 January 2016.
This will mean that to confirm what expenditure will qualify for AIA for accounting periods ending in 2016, it must be ensured that the effect of the reduced limit, the transitional rules and the date of qualifying expenditure are considered.
This can be illustrated with an example. A business with a year end of 31 March 2016 will potentially have available AIA of £425,000 ((£500,000 x 9/12) + (£200,000 x 3/12)).
However, despite the limit never having been below an amount of £200,000 for the whole year, if the business has no qualifying expenditure prior to 31 December 2015 and then spends £200,000 in February 2016, the available AIA is only £50,000 (£200,000 x 3/12).
A business with any 2016 year end with a similar pattern of qualifying expenditure will only qualify for the full £200,000 limit if it has a 31 December 2016 year end. Therefore, to maximise the available AIA, it is likely that any planned expenditure in an accounting period ending in 2016 should be made prior to 31 December 2015.
Farming businesses planning to acquire plant and machinery in 2016 that will qualify for capital allowances should check the AIA position to confirm if all of the expenditure will be covered by the available AIA. If not, they should consider bringing expenditure forward so that it occurs before 31 December 2015, in order to maximise the available AIA.
When planning the date of expenditure to maximise the AIA, a farming business will need to consider:
- their accounting year end;
- the amount that has been spent;
- the amount to be spent;
- and the date of expenditure.