The capital allowances seesaw

The capital allowances seesaw

The Annual Investment Allowance (AIA) provides a tax write off against profits for expenditure incurred on plant and machinery (not cars) for most businesses and owners of commercial property.

In the Autumn Statement 2012, the Chancellor announced a temporary increase in the amount of AIA available from £25,000 to £250,000. Budget 2014 further increases the amount of the AIA to £500,000 but it is still described as a temporary increase. This means that the AIA will revert to £25,000 and so capital expenditure plans should take this eventuality into account.

Changes to the AIA - key dates

The maximum AIA was increased to £250,000 for expenditure incurred on or after 1 January 2013. This temporary increase was originally due to end by 1 January 2015.

The amount of the AIA is further increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015.

What happens if the accounting period of the business straddles the 1/6 April 2014?

A pro rata calculation of the maximum entitlement is required. An example of how this works is shown below.

Example
LED Ltd makes up its accounts to 30 June annually. For the year to 30 June 2014, the AIA limit is calculated as follows:

July 2013 - March 2014

9/12 x £250,000

= £187,500

April 2014 - June 2014

3/12 x £500,000

= £125,000

Total

£312,500

But does it matter when the expenditure is incurred in the accounting period?

Yes it does. For expenditure incurred before 1/6 April 2014, there is a limit to the maximum figure available. The maximum allowance will be the AIA that would have been due for the whole of the accounting period to 30 June 2014, if the increase in AIA had not taken place. The company would have been entitled to £250,000 for the 12 months and so this is the limit for the nine months to 31 March 2014.

In the example, if LED Ltd had spent £300,000 in the first nine months of the accounting period relief would be limited to £250,000. LED Ltd can then spend £62,500 (£312,500 - £250,000) in the three months to 30 June 2014 which will qualify for AIA.

If LED Ltd has not incurred any expenditure in the first nine months, £312,500 will be available for expenditure between 1 April and 30 June 2014.

What happens in 2015 and onwards?

The AIA remains at the high level of £500,000 for the 12 months to 31 December 2015. Then on 1 January 2016, the AIA reverts back down to £25,000.

What do I do?

The increase in AIA is positive for businesses but the increase is a temporary measure. There are other restrictions which can affect the availability and use of the AIA so careful planning may be required to ensure that capital allowances are maximised. If you would like to discuss these changes, please do get in touch.

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