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, increased to £250,000 and then doubled to £500,000 over a period of 8 years!! It is set to decrease again to just £25,000 as of 1 January 2016 and so timing your capital expenditure is very important.
We currently have a window of certainty where businesses can invest with confidence knowing they can utilise the AIA whilst it is at its highest level.
So why is timing critical?
The level of AIA a business can claim is calculated by reference to its accounting period.
For instance, if your businesses accounting period is 31 March 2016 and you buy a £100,000 lorry on or before 31 December 2015, you would get 100% tax relief on £100,000 giving a tax saving of £20,000 (100% of £100,000 at corporation tax rate of 20%).
However, if you bought it on 1 January 2016, just one day later, your tax relief could fall to just £3,600 (18% of £100,000 corporation tax rate of 20%).
Even better, for accounting periods ended on or before 31 December 2015 companies continue to have the full £500,000 AIA available to utilise.
The timing of expenditure for your business can’t be driven solely by tax, however, if you have some discretion accelerating expenditure by a month or two can achieve significant tax savings, as shown by the example above.
If you would like to discuss in more detail what qualifies and if timing your expenditure could work for you please contact Lesley Sutton on 01484 550 037 or email firstname.lastname@example.org