Tax Factor
01 June 2011
Planning Ahead for Capital Expenditure – Annual Investment Allowance
The Chancellor, George Osborne, announced in his emergency budget on 22 June 2010 the reduction of the Annual Investment Allowance from £100,000 per annum to only £25,000 per annum from 6 April 2012 for unincorporated businesses, and from 1 April 2012 for companies. Planning is required now to take advantage of the current level of allowance whilst it remains.
What is Annual Investment Allowance ("AIA") and to whom does it apply?
The AIA is a 100% deduction from taxable profits for qualifying expenditure on plant and machinery. It can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non residential property business or a furnished holiday let.
Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.
In the current fiscal year, qualifying capital expenditure of up to £100,000 by a business could qualify for 100% deduction in calculating taxable profits. This is reducing to £25,000 per annum from April 2012.
How could this change impact you?
If significant expenditure (exceeding £25,000) on 'plant and machinery' is being planned, consideration should be given to the purchase of these items before April 2012 to take advantage of the current £100,000 AIA.
For an unincorporated business the following benefits may arise:
- There is the potential to receive a 100% deduction from taxable profits of up to £100,000
- Sole traders/partners paying higher rate tax, have the potential to save tax at 40% or even 50%
- If the deduction reduces an individual's taxable income for 2011/12 to below £100,000, thereby retaining the personal allowance, this would give a tax saving at an effective rate of 60%
For companies:
- There is the potential for tax savings of up to £20,625 based on the marginal corporate tax rate in 2011/12
- Generate a tax loss during 2011/12, which can be carried back to set against profits in the prior accounting period to generate a repayment of tax or carried forward against future profits from the same trade.
Limitations to the use of AIA
If your accounting period straddles 5 April 2012 for personal tax or 1 April 2012 for corporation tax, then there will be a time apportionment of the £100,000 and the £25,000 AIA.
For companies which are in a group structure or are 'related' companies, the AIA is shared between the group and other related companies for tax purposes, although the actual split between each company can be determined in the most tax efficient manner.
Capital expenditure in excess of the AIA limit qualifies for writing down allowances, currently at the rate of either 20% or 10% per annum on a reducing balance basis. These rates fall to 18% and 8% respectively from April 2012.
Examples of items which qualify and do not qualify for AIA
There are a long list of items which qualify as plant and machinery, and examples include the following:
- Tools and equipment
- Computers
- Office equipment and furniture
- Computerised machinery
- Vans for business purposes
- Capital expenditure on computer software
- Integral features of a building, such as electrical systems
Items which do not qualify for AIA include:
- Cars
- Walls, floors, doors, windows and stairs
If you would like further details on what type of expenditure may qualify for 100% Annual Investment Allowance, advice on making claims in the most tax efficient manner, or answers to any other queries in relation to the above, Wilkins Kennedy would be pleased to be of assistance.
