Annual Investment Allowance Changes
The Annual Investment Allowance (AIA for short) gives businesses full tax relief in the year on qualifying capital expenditure, up to a certain amount. The AIA has recently been very generous, and is currently £500,000, however from 1 January 2016 it is going down to a new rate of £200,000. This new rate is supposed to be a permanent change, and while nothing is forever in government tax policy, it does give a little more certainty than we’ve had in recent years.
For companies with a December year end, this is a straightforward switch, however for any other company whose accounting period straddles 31 December, there are some transitional rules which will have to apply. There are essentially two factors to take into account in this situation.
1. The Annual Investment Allowance is pro-rated based on the number of months which fall into the new rules, and the months which fall into the old rules, to give a hybrid Annual Investment Allowance for the whole period.
2. The period post 31 December is then considered in isolation to give a maximum amount that can be claimed in this sub-period.
AIA Transitional Rules Example
Castle Limited has a 31 March year end. For the year ended 31 March 2015 it had a full £500,000 AIA, however the year ended 31 March 2016 falls under the transitional rules. Qualifying expenditure in the year ended 31 March 2016 was £450,000.
Step 1 – Pro Rate the AIA pre & post 31 December
9/12 x 500,000 = 375,000
3/12 x 200,000 = 50,000
Total = £425,000
Step 2 – Restrict post 31 December expenditure
Castle Limited spent £100,000 of its £450,000 qualifying expenditure between 1 January and 31 March 2016. It can only claim a maximum of £50,000 however for that sub-period.
Total qualifying expenditure is therefore £400,000 (£350,000 + £50,000)
If however it had incurred all of its expenditure before 31 December, it could have claimed £425,000 of Annual Investment Allowance.
Because of the change in the Annual Investment Allowance and the transitional rules, if you spend a significant amount on capital additions it is important to consider carefully the timing of your capital expenditure to maximise the use of this allowance. Obviously the most important date is 31 December, and businesses will want to look at bringing forward any planned expenditure to before the end of the year, however it also very much depends on what your year end is, and whether you are close to the AIA limits. Here are some further points to consider.
• If you’ve got any spare Annual Investment Allowance remaining at the end of a period, it is always worth considering if you can bring forward any planned expenditure to before your year end to maximise the allowance.
• If you have an accounting period end which is late in the calendar year, such as an October or November year end, but have used up your AIA for that period, it is worth trying to postpone capital expenditure until after your year end, but before 31 December, to maximise allowances.
• If you have an accounting period end date which is early in the calendar year, such as January, February or March year ends, be careful of incurring significant expenditure after 31 December but before your year end, as the transitional rules could leave you missing out.
If you would like some advice regarding maximising your capital allowances, get in touch with either your normal client contact or someone from the Corporate Tax Team.