When the previous government doubled the annual investment allowance (AIA) from £50,000 to £100,000, the response was widely received in positive manner. It was also a way for the former government to keep our businesses spending to apparently “stimulate growth” within the economy. However, since the coalition government gained power the “goal posts” have subsequently moved. The chancellor has confirmed plans in the spring budget to reduce the AIA to £25,000. This reduction will take effect from 6 April 2012. This means that if you are planning to spend significant funds on plant and machinery, you should think about doing so before this date!
AIA is a form of capital allowance, which offers tax relief at 100 per cent on all qualifying expenditure in the year of purchase. The maximum you can deduct from your taxable profits is £100,000 (or the reduced rate £25,000 from 6 April 2012). This is adjusted for short or long periods, and also for periods that span the rates and dates of the allowance.
Almost all types of business entity can claim AIA, provided the business activity satisfies one of these criteria.
Trading entity: Commercial property letting; office or employment: or leasing. The only business structures which are not eligible for the AIA are “mixed partnerships” (that is, partnerships comprised of both individuals and companies) and trustees.
Please kindly note though, that there are a few exclusions. Splitting a business with related interests into a group of companies is a common tax planning strategy, but it won’t help in the case of the AIA. Why? The subsidiaries would not get a £100,000 allowance each, this would be shared between them. This is also the case for related companies under common control (“related” companies are those who carry out related activities or share a business premises). If you run a company which has a group structure we would recommend that you seek advice with taxation advisor who will assist with some tax planning.
When you exceed the first £100,000 threshold, a default rate of 20 per cent is applied to apportion the investment over subsequent years. So, if a purchases £190,000 worth of new machinery, it can allocate the first £100,000 of expenditure against the AIA and the remaining £90,000 would achieve tax relief at 20 per cent a year on a reducing balance. Please also note that within the spring budget the government has changed the default rate to 18 per cent from 6 April 2012.
You should also be aware there are a number of types of asset that would not qualify for the allowance, such as cars. Therefore additional advice should be arranged.
Investment in certain green technologies is eligible for enhanced capital allowances (ECA). These are in addition to the £100,000 allowance and, like the AIA, would be eligible for 100 per cent tax relief in the first year. A set of qualifying technologies is available on the ECA (Enhanced Capital Allowances) website. A link to this site is shown at the end of this article
Spending on repair or replacement is normally an allowable deduction against income and so full tax relief is given immediately. However, if the repair or replacement costs in the last 12 months are greater than half of the total cost of replacing an asset, the spending is treated as capital expenditure. For example, if a business spends £3,000 in the last 12 months repairing or replacing parts of its photocopier, but the total cost of replacing the copier is £5,000, then the £3,000 would be treated as capital expenditure and qualify for allowances at 10 per cent.
The sizable reduction to the AIA threshold from 6 April 2012 marks a large change for all businesses so therefore I believe it would be advisable that large outlay on plant and machinery is brought forward and utilised within the next 12 months. It effectively means the chance to save up to 50p in taxable profits for every £1 a company has invested in new equipment. Not an allowance to be sniffed at!
Enhanced Capital Allowances Website:- www.eca.gov.uk