The Autumn Statement announced that the Annual Investment Allowance (AIA) for capital allowances will increase from £25,000 to £250,000 from 1 January 2013 for a period of two years. This will mean that the amount spent on new machinery that will obtain a 100% tax deduction in the year of expenditure has potentially increased.
When planning the timing of expenditure, however, farmers and landowners need to consider the date of their accounting year end and what other expenditure they have incurred in their financial year.
How much of the increased allowance will be available?
Based on how changes in the AIA have been previously implemented, the allowance available will depend on the year end of a business and what expenditure has previously been incurred in that accounting year.
If a business has a December year end and incurs £250,000 of eligible expenditure in January 2013, a 100% tax deduction can be claimed for this expenditure in the year ended 31 December 2013.
A business with a March year end, however, that incurs £250,000 of eligible expenditure in January 2013 will only be eligible for a maximum AIA of £81,000, even if they have incurred no other eligible expenditure during the year ended 31 March 2013. This is because for nine months of the year, the AIA was only available at a rate of £25,000.
Possible tax refund available
If the increased AIA creates a tax loss, it is possible that this may generate a tax refund. However, for individuals trading as a sole trader or a member of a partnership, it is expected that from 5 April 2013 there will be restrictions in the ability to set trading losses against other income in the current tax year or the previous tax year.
The increased AIA is good news for farmers and landowners who are planning to spend on new machinery in the near future. However, the date of any expenditure needs to be planned carefully in order to maximise the available tax allowances.
If you would like to discuss any tax planning please contact Nick Dee or Peter Griffiths on 01242 680000.