DSG's Monthly Tax Tip

Posted by Hillary Griffin

Tax Manager - DSG

Thu 08th, Oct

Making the most of the Annual Investment Allowance

The Annual Investment Allowance (“AIA”) was introduced in 2008 to give businesses 100% relief for certain types of capital expenditure in the year of acquisition. In subsequent years the level of the Allowance has fluctuated from £25,000 to £500,000, which has made it difficult for businesses to know how much tax relief they will obtain when planning major capital expenditure projects. In the Summer Budget in July, George Osborne announced that the AIA would be reduced from £500,000 to £200,000 from 1 January 2016, but would then remain unchanged for the life of this Parliament.

What expenditure qualifies?

The AIA may claimed on the following types of expenditure:
 Plant and equipment.
 Commercial vehicles.
 Fixtures and fittings.
 Integral features of a building, such as; heating and electrical systems, air conditioning and cold water installation.

Expenditure on cars does not qualify, nor does expenditure on structural alterations to a building.

What happens if my business’s year end is not 31 December?

If the business’s year end is 31 December, the transition to the new rate of AIA is straightforward, as the AIA for the year to 31 December 2015 will be £500,000 and for the year to 31 December 2016, £200,000.

However, if, for example, the year end is 31 March, a time apportionment calculation is necessary:

9 months to 31 December 2015 £500,000 * 9/12 £375,000
3 months to 31 March 2016 £200,000 * 3/12 £50,000
AIA for the year £425,000

Does it matter when the expenditure is incurred?

Yes, it does, and this is where planning will be beneficial. Whilst the business could spend £425,000 in the 9 months to 31 December 2015 and claim AIA on the full amount, it can only spend £50,000 in the 3 months to 31 March. If the business has not yet used its AIA for the period, but plans significant capital expenditure in the next few months, it will be worth advancing the expenditure so that is before 31 December.

Expenditure is treated as incurred when it is invoiced, provided that there are no extended credit terms. There are special rules for hire purchase contracts and further advice should be sought if expenditure on hire purchase is being made close to 31 December.

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