The Summer Budget this year introduced a number of changes for UK businesses and companies; one of which was the change to the Annual Investment Allowance (AIA).
This allowance, which provides 100 per cent tax relief on the cost of qualifying fixed asset additions, has now been permanently set at £200,000 per annum per qualifying business, with effect from 1 January 2016. Despite this being a reduction from the previous temporary limit of £500,000, it is far more generous than the £25,000 originally planned.
The allowance is one of the most generous in the capital allowance regime and covers items of plant and machinery, such as trade tools and equipment, as well as items that would otherwise qualify for a lower allowance, such as electrical, cold water and space heating systems in buildings.
As with previous changes to the AIA, it is important to understand the impact of the change for periods straddling 1 January 2016, as calculating the available allowance for that period is not simple.
If your year end falls after 31 December, and you have a high level of capital expenditure or are considering significant purchases of new equipment, it is important that you consider whether the AIA will be sufficient to cover your plans, or whether any element should be brought forward to before 31 December. The mechanics of the AIA calculation mean that relief may be significantly restricted if the purchase is made in the new year.
The example below should assist you in calculating how much AIA will be available when planning any upcoming capital expenditure.
Assume a 12 month period from 1 April 2015 to 31 March 2016. Firstly, the period is split into pre 1 January 2016 and post 1 January 2016. Period ‘A’ being the nine month period to 31 December 2015, and period ‘B’ being the three month period to 31 March 2016.
Period A falls within the time when the AIA limit was £500,000 per year. The AIA available in that period is therefore £500,000 x 9 / 12, which equals £375,000.
Period B falls within the new AIA limit of £200,000 per year. The AIA available in that period is therefore £200,000 x 3 / 12, being £50,000.
As a result, the maximum AIA available to the business for the year to 31 March 2016 is the total of these two figures, which is £425,000.
However, special rules exist which mean that whilst this total figure can be claimed against any qualifying expenditure incurred during period ‘A’, the maximum that can be claimed for expenditure incurred in period ‘B’ is the AIA calculated for that period (£50,000).
For example, if you were to buy a piece of equipment costing £400,000 in period ‘A’, the whole amount would qualify for the AIA. But, if the same piece of equipment was actually purchased in period ‘B’, only £50,000 of the cost would qualify for the AIA. The remainder of the cost would qualify for ‘writing down allowances’ which, although they provide the same value of allowances over the course of the life of the business, do so at a much slower rate over a longer period of time.
For 12 month periods after that which straddle 1 January 2016, the AIA will be £200,000 and this will be prorated accordingly for shorter periods.
As always, businesses need to be aware of the restrictions to AIA, including the fact that only one is available per corporate group, and to businesses considered to be connected and undertaking ‘related’ activities.
For more information about how Milsted Langdon’s capital allowance specialists can assist you, please contact us.