The Annual Investment Allowance (AIA), which allows a 100% tax deduction in the year of purchase for qualifying expenditure on what is known as “plant and machinery”, which broadly covers equipment, fixtures and fittings, integral features (for example water, heating, electrical and lighting systems), commercial vehicles and vans is set to reduce from the current level of £500,000 to £200,000 from 1 January 2016.
The AIA has been set at £500,000 per annum since 1 April 2014, although it has changed four times since 2008 – the government keeping us all on our toes you might say!
The AIA still represents good news, particularly as it had previously been suggested it would reduce back down to £25,000 from 1 January 2016. The government have suggested it will be fixed at £200,000 per annum for the length of this parliament (or so they say!).
Just to recap, the AIA only applies where items are purchased, whether through cash, using a loan or on hire purchase (but not finance leases). It does not apply to cases where equipment is rented (i.e. operating lease or contract hire), as instead tax relief is obtained based on the level of those rental payments over the course of the lease, i.e. tax relief is typically received more slowly in that case.
Assuming we are dealing with purchased costs (as defined above), lets summarise various types of capital expenditure to see when the AIA is available:
- Fixtures and integral features (see above).
- Commercial vehicles and vans.
No AIA available
- Structural building work, i.e. bricks and mortar. Whilst the AIA is not available, if the property owner incurs the costs instead, tax relief will be available on the costs incurred if they sell the property in the future.
- Repairs and maintenance including painting/decorating. Although the AIA is not available, tax relief is available by reducing profits through the profit and loss account, which in effect provides a similar benefit to the AIA.
£200,000 for the AIA still seems quite high, is there a catch? Yes, potentially – please read on:
The transition to the reduced allowance will mean that practices with a year end in early 2016 may find that planned expenditure does not receive a 100% tax deduction as anticipated unless the timing of such expenditure is planned carefully. This could be particularly relevant if you are undertaking a practice refurbishment or investing significantly in new equipment.
Let’s illustrate this with some examples.
Example 1 – 31 March 2016 year end
A practice with a year end of 31 March 2016 will have potential available AIA of £425,000, being (£500,000 x 9/12 months) + (£200,000 x 3/12 months).
However, despite the limit never having been below an amount of £200,000 for the whole year, if the practice has no qualifying AIA expenditure by 31 December 2015 and then spends say £200,000 on or between 1 January 2016 and 31 March 2016, then the available AIA is only £50,000 (£200,000 x 3/12) in that 3 month period.
Example 2 – 31 January 2016 year end
An ever starker example would be that of a practice with a year end of 31 January 2016, which will have potential available AIA of £475,000 being (£500,000 x 11/12 months) + (£200,000 x 1/12 months).
On the face of it this looks like a better position than our practice with the 31 March 2016 year end. However, if this practice has no qualifying AIA expenditure by 31 December 2015 and then spends say £200,000 on or between 1 January 2016 and 31 January 2016, then the available AIA is only £16,667 in that 1 month period.
Example 3 – 31 December 2016 year end
This practice will have AIA of £500,000 for the whole of the year ended 31 December 2015 and £200,000 for the whole of the year ended 31 December 2016.
The examples above are not exhaustive although hopefully illustrate the impact of different year ends.
What if the AIA is exceeded?
Expenditure qualifying for the AIA but which exceeds it, will normally be eligible for an 18% tax deduction (instead of 100%) on a reducing balance basis.
For example, say £10,000 of expenditure x 18% = £1,800 reduction in taxable profits.
In the following year, £8,200 of expenditure has yet to receive tax relief (the £10,000 less £1,800), so £8,200 x 18% = £1,476 reduction in taxable profits.
Effectively tax relief is still available in this case, just at a slower rate.
Anything for me to do?
If you are currently undertaking or planning significant capital expenditure, if this has not already been discussed, please do let me or one of the team know so that we can advise accordingly to ensure you maximise the tax savings available to you.
If planned expenditure is relatively low, then you may well not need to change anything, although this will be driven by your year end to a great extent.