01 February 2013
Another Change to the AIA
The Annual Investment Allowance (“AIA”) is a 100% deduction against taxable profits available to businesses, based on total expenditure incurred on qualifying plant and machinery in an accounting period, and subject to a capped limit. Last month the Government announced a significant increase in the maximum AIA available to businesses each year. This article explores the impact of this change, the value of the AIA and some planning opportunities to consider.
Recent changes to the allowance
- The maximum cap applicable to the Annual Investment Allowance (“AIA”) which can be claimed by a business increased significantly with effect from 1 January 2013 to £250,000 per annum.
- The allowance was previously capped at just £25,000 (this rate was applicable from 1 April 2012 for companies or 6 April 2012 for unincorporated businesses), and the increase this month makes it fourth amendment to the maximum limit since the introduction of the AIA in 2008. It is intended that the AIA will now remain at £250,000 until 31 December 2014.
Availability of the AIA
The allowance is available on an annual basis and if not used it is lost; any unused allowance cannot be carried forward. Careful consideration should be given to the timing of relevant capital expenditure to maximise any claims.
It is important to note that the allowance is shared where there are group companies or related businesses, with the cap applying to the expenditure in aggregate across those connected businesses.
Any new expenditure on plant and machinery for use in a qualifying activity (e.g. a trade) qualifies for the AIA, apart from the following main exceptions:
- plant and machinery gifted to the business
- expenditure incurred in the accounting period in which a business ceases to trade.
How much AIA can be claimed?
The amount which can be claimed depends on when expenditure has been incurred. If an accounting period spans the dates when the maximum annual investment allowance (AIA) has been varied, then there are special transitional rules for calculating the value of a claim.
The total available AIA is based on a time apportionment of the maximum allowances for the relevant periods.
For example, if a company’s accounting period (12 months in duration) commences on 1 April 2012 the maximum AIA available for that year is £81,250 (being 9/12 of £25,000 for 1 April 2012 to 31 December 2012; and 3/12 of £250,000 for 1 January 2013 to 31 March 2013).
However, there is a limit on the level of AIA that can be claimed in the period up to 31 December 2012. The maximum AIA that can be claimed on expenditure incurred in the period up to 31 December 2012 is limited to £25,000 (being the maximum AIA for the period prior to 1 January 2013).
Therefore, for a year end of 31 March 2013, if a business incurred £100,000 of qualifying capital expenditure, but this was all incurred before 31 December 2012, the maximum AIA claim would be £25,000. To make full use of the AIA available (£81,250 for the period of account in our example) the business would have to spend a maximum of £25,000 before 31 December 2012 and the balance on or after 1 January 2013.
Planning opportunities and future considerations
The increase in the AIA cap to £250,000 is temporary and will reduce back down to £25,000 on 1 January 2015 in the absence of any future amendments to legislation. Therefore it is important that this is taken into account when considering future capital expenditure on plant and machinery. It would be beneficial to accelerate any planned capital expenditure so that it is incurred prior to the AIA decreasing back down to £25,000.
If significant expenditure is planned for early 2013, and your business has an accounting period which spans 1 January 2013, then it will be particularly important to seek advice as it may be possible to shorten an accounting period in order to maximise the AIA available in the period of a business’ largest levels of capital expenditure.
If you would like further information on the capital allowances available to your business, including the annual investment allowance, please speak to your local Wilkins Kennedy advisors. In particular, if your business is considering significant capital expenditure it is important to seek appropriate advice in order to maximise the tax relief available.
Corporate Tax Manager
t: 01962 852263 / 01794 515441