Hall Livesey Brown is reminding businesses across the North West and North Wales that the Annual Investment Allowance (AIA), which allows businesses to claim tax relief on allowable capital expenditure of plant and equipment, will reduce substantially from 1 January 2016.
The AIA provides a tax write-off against profits for expenditure incurred on plant and machinery by businesses and owners of commercial property.
There has been a temporary level of £500,000 in place since April 2014 (1 April 2014 for companies and 6 April 2014 for unincorporated businesses). In the Summer Budget in July 2015, the Chancellor announced that this is being reduced to a permanent level of £200,000 from 1 January 2016.
Capital requirements should be considered before the end of the year but before doing so, it is important that you are aware of the following:
What happens if the accounting period of the business straddles the 1 January 2016?
A pro rata calculation of the maximum entitlement is required. The maximum allowance for that period is the sum of:
- the maximum AIA entitlement based on the £500,000 annual cap for the portion of the accounting period falling before 1 January 2016; and
- the maximum AIA entitlement based on the £200,000 cap for the portion of the accounting period falling on or after 1 January 2016.
A company makes up its accounts to 31 March annually. For the year to 31 March 2016, the limit is calculated as follows:
April 2015 – December 2015 9/12 x £500,000 = £375,000
January 2016 – March 2016 3/12 x £200,000 = £50,000
Does it matter when the expenditure is incurred in the accounting period?
Yes it does. For expenditure incurred before 1 January 2016, there is a limit to the maximum figure available. The maximum allowance is the AIA in the computation above, namely £425,000.
However, if expenditure is incurred on or after 1 January to 31 March 2016, the maximum amount of relief will only be £50,000.
Alternatively, the business could defer its expenditure until after 31 March 2016. In the accounting period to 31 March 2017, the AIA will be £200,000. However tax relief will have been deferred for a full year.
Other points to be aware of:
- AIA it is not available for expenditure on cars.
- Certain businesses are not entitled to any AIA.
- In some situations, a business may not be entitled to the AIA as computed above as the AIA limits may need to be shared with other businesses which are under common ownership.
- There are special rules for determining the date of when capital expenditure is incurred for tax purposes in some circumstances. Please contact us if a contract is being signed with a credit period of more than four months or a hire purchase agreement is being entered into.
Adrian Crank, Managing Partner and Tax Advisor, Hall Livesey Brown said: “The timing of the expenditure around 1 January 2016 is critical. We would strongly advise business owners to speak to their accountant before planning any capital expenditure. It is worth noting however that this important reduction in allowance is happening soon but if businesses make capital expenditure decisions without proper advice it could be costly.”
For advice on the Annual Investment Allowance, please contact your usual Hall Livesey Brown advisor or a partner at one of our regional offices .