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Annual Investment Allowance – don’t be caught out

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13 October 2015

The Annual Investment Allowance (AIA), which allows a 100% tax deduction for qualifying expenditure on plant and machinery, reduces from the current level of £500,000 to £200,000 from 1 January 2016.

Transitional rules apply, which will affect the level of qualifying expenditure that can be incurred dependent upon the year end of the company.  The date of the qualifying expenditure could be key to ensure maximum relief is obtained but the unwary may be caught out and left with a higher tax bill than expected.

Available relief

The relief available 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).

Similarly, a business with a January year end would only be entitled to an AIA of £16,667 (£200,000 x 1/12) for the month of January 2016 and a company will only qualify for the full £200,000 limit if it has a 31 December 2016 year end. 

Action required

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 business will need to consider:      
  • their accounting year end;
  • the amount that has been spent to date;
  • the amount to be spent; and
  • the date of expenditure.

The good news is that the Chancellor has committed to fixing the AIA at £200,000 for at least the term of this Parliament so once we have got over this transition we should not have to worry about fluctuating AIA’s for a little while!