Usually when a business invests in assets such as plant and machinery, office equipment, fixtures and fittings and vehicles (except cars) the tax relief is spread over the lifetime (or longer) of the asset.
However, the Annual Investment Allowance (AIA) allows businesses to claim a certain amount of their annual expenditure in relation to these assets upfront such that they get 100% tax relief in the year of purchase.
Initially introduced at £50,000 it was then increased to £100,000, dropped to £25,000, escalated to £250,000 and then doubled to £500,000 over the period of 8 years. However, currently it is set to decrease again to just £25,000 (from £500,000) as of 1 January 2016 and so timing of expenditure is important.
The current Government have promised that this large drop will be addressed as part of the Autumn Statement, but this is dependent on the Election. So it is worthwhile planning any large capital expenditure projects to maximise AIA.
So why is timing critical?
The level of AIA a business can claim is calculated by reference to the business’s accounting period.
If your accounting period ends on or before 31 December 2015, you have the full £500,000 AIA available to utilise. However, if your accounting period straddles the reduction in allowance from £500,000 to £25,000 the position is different:
• If your accounting period is 31 March 2016, under the current rules, you have 9 months @ £500,000 (£375,000) and 3 months at £25,000 (£6,250) giving a total maximum claim of £381,250 for the period.
• However, and critically, in the above example a maximum of £6,250 is available in respect of expenditure between 1 January 2016 and 31 March 2016.
• So, if you bought a £100,000 lorry on or before 31 December 2015, and your other qualifying additions did not exceed the threshold, you would get 100% tax relief on £100,000 giving a tax saving of £20,000 (tax rate of 20%).
• If you bought it on 1 January 2016, just one day later, and assuming you already had £6,250 of qualifying assets purchased in that part of the period your tax relief would be just £3,600 (£100,000 @ 18% relief over life @20% tax rate).
The timing of expenditure will always be subject to business need, however, if you have some discretion, the above example demonstrates significant tax savings could be achieved.
If you would like to discuss the timing of your expenditure further so to maximise relief please contact Lesley Sutton on 01484 550 037 or email firstname.lastname@example.org