Annual Investment Allowance

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Emory McDonald
6 years ago
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1 What is Annual Investment Allowance (AIA)? The AIA is a kind of capital allowance, which offers a 100% allowance on qualifying capital expenditure in the year of purchase. AIA was introduced in 2008, providing 100% allowance on the first 50,000 investment in qualifying capital expenditure. The maximum allowance was doubled to 100,000 in April 2010, and was reduced to 25,000 with effect from 01 April 2012 (06 April 2012 for unincorporated businesses). What has changed? In the Chancellor s 05 December 2012 Autumn Statement the AIA limit was temporarily increased from 25,000 to 250,000 for a two-year period. This temporary increase to the maximum AIA took affect on 01 January 2013 and means that 100% allowance is available on up to 250,000 per annum of capital expenditure incurred on qualifying equipment before 01 January Why has it been introduced? The measure is designed to stimulate growth in the economy by providing a time-limited incentive for businesses to make new investment in new or used plant or machinery. In addition to providing a financial incentive for business investment in capital equipment, the initiative is also expected to help suppliers and manufacturers by increasing their order books. Over the last few years we have regularly come across business owners delaying decision-making because of the continuing economic uncertainty. It is anticipated that this policy will mean that these businesses will be able to pursue capital investment with a significantly reduced level of financial exposure. What is qualifying expenditure? Qualifying expenditure covers most assets purchased for use by businesses. It includes Office furniture and equipment Vans, lorries and equipment Building fixtures e.g. shop fittings, kitchen or bathroom fittings Business machines e.g. printing press, lathes, tooling machines Tractors, combine harvesters and other agricultural machinery Gaming machines, amusement rides Computer hardware and software Computerised/computer aided machinery including robotic machines Wind turbines and fibre optic cabling Driving school cars (adapted with dual control mechanisms) Are there any items of capital expenditure that do not qualify? Land, buildings or cars Expenditure incurred in the accounting period when trade ceased permanently Existing plant and machinery Plant and machinery that was gifted Plant and machinery under a long funding lease and subsequently brought into use for other purposes Change in the nature/conduct of the trade carried out by a person other than the person incurring the capex and AIA is the main or one of the main benefits of making the change

2 Who can claim? Almost any business whether chargeable to corporation tax or income tax is eligible for AIA. One exception of a business structure which cannot claim AIA is a mixed partnership (that is, a partnership comprised of both individuals and companies), and also trustees. What happens after 01 January 2015? We do not know for certain but there are indications that the AIA could revert to a lower level after 31 December It is therefore important that businesses that are planning to invest in the near future, and would like to take advantage of this increase, do so within the two year period of temporary increase in AIA. Are there any limitations? Where a business s accounting period straddles a date of change of the AIA limits (i.e. 1 / 6 April 2012, 1 January 2013 and or 31 December 2014), there is an impact on the maximum AIA available to the business in that accounting period. In calculating the maximum AIA available to the business, the accounting period is divided into separate chargeable periods straddling the date of change and the AIA limits are time apportioned examples are on the following pages. How is it relevant to leasing? AIA can be claimed where there is a hire purchase (HP) arrangement in place with intent of ownership. You do not have to have paid in full for the plant or machinery to claim the AIA. The allowances are given as though it was an outright cash purchase and ownership is deemed from the beginning, even though the rentals are payable over the term of the HP agreement. There is also tax relief for HP interest charged to the profit and loss account. If there is a lease in place, the asset will not appear as an asset on the lessee s / hirer s balance sheet (the asset is owned by the leasing company) and AIA cannot be claimed by the customer, unless the lease is a long funding lease. Assets acquired under sale and leaseback arrangements where the leaseback is a finance lease, and in certain other circumstances, are not eligible for AIA. If a business treats a lease as a long funding lease and is entitled to capital allowances on the asset being leased, we would suggest that it takes advice from a tax adviser about AIA entitlement. How does the increased AIA benefit my business? The main advantage of AIA is that it accelerates the timing of tax relief on qualifying capital expenditure. Depending on the timing of the investment, the temporary increase in AIA means that many businesses are able to bring forward the tax relief on more of their capital expenditure. However it is worth businesses considering advancing or deferring investments in order to maximise their AIA over the period it is available. How is green technology treated under AIA? Investment in certain green technologies is eligible for enhanced capital allowances (ECA). There is no maximum limit for ECA. These are distinct from the 250,000 allowance available on assets that do not qualify for ECA and the two should not be mixed together. ECA is a 100% first year allowance (FYA) available for the cost of capital expenditure in the chargeable period in which it is incurred. There is no time apportionment of the FYA if the chargeable period is less than twelve months. Businesses will need to take their own advice as to which expenditure qualifies for ECA or AIA. How do I claim AIA? The first 250,000 of expenditure is 100% allowable effectively as a deduction in calculating the taxable profits of a business, with any excess qualifying expenditure dealt with under the normal capital allowances regime attracting the 18% or 8% annual Writing Down Allowance (WDA) in the first year and the balance going into the pool of allowances for subsequent years. Example 1 on the next page demonstrates how this works, although we would encourage you to speak to your financial adviser or whoever is preparing your accounts to ensure that you benefit from the full allowance to which you are entitled.

3 Additional important points to consider: The timing of investment can be critical. Equipment bought on and after 01 January 2015 will be subject to the reduced AIA cap of 25,000, unless the Chancellor of the day has another change of mind. The AIA cap for accounting years that end on 31 December 2013 and 31 December 2014 will be 250,000 per year. But where your business has an accounting period that straddles 01 January 2013 or has a different accounting period end, the calculation of the AIA cap is complicated. If, for example, your accounting year ends on 31 March 2013, you need to split the accounting period (for AIA purposes only), into: 01 April 2012 to 31 December 2012 (portion of 25,000 AIA); and 01 January 2013 to 31 March 2013 (portion of 250,000 AIA) The maximum AIA for the business is the sum of the portions of the AIA cap due for each of those sub-periods. However, the timing of the expenditure is also important in order to gain the maximum advantage from the temporary AIA limit increase. Example 1: Maximum AIA vs Actual AIA For a company with a 31 March year end, the maximum AIA is 81,250 as the AIA limits changed during the accounting period. 01 April 2012 to 31 December 2012: 9/12* 25,000 = 18,750, plus 01 January 2013 to 31 March 2013: 3/12* 250,000 = 62,500 Therefore maximum AIA is 81,250 However, the actual AIA available depends on the timing of the expenditure. The balance of the expenditure not eligible for AIA will be eligible for the writing down allowances. Period qualifying expenditure is incurred 01 April 2012 to 31 December January 2013 to 31 March 2013 Actual AIA available Accounting period ended 31 March 2013 Balance eligible for Writing Down Allowance (WDA) 18% / 8% Scenario 1 81,250 nil 25,000 56,250 Scenario 2 nil 81,250 81,250 nil Scenario 3 50,000 31,250 56,250 ( 25,000 pre-01 January + 31,250 post 31 December) 25,000 25,000 is the maximum AIA which would have been available had there been no change in the AIA amount and the amount eligible to Writing Down Allowances

4 Maximum benefits of the temporary AIA increase Example 2: Accelerating expenditure Sole trader has a 31 March year end (y/e). With the temporary increase in AIA he is planning to replace numerous machines at a cost of 250k. These are main pool assets eligible for Writing Down Allowances (WDAs) at 18%. No other capital expenditure is planned over the next two years. He decides to defer the expenditure to the y/e 31 March He is a higher rate (40%) tax payer. PLANNED CAPEX No expenditure in y/e 31 March 2013 Incur 250k of expenditure in y/e 31 March 2014 AIA WDA Tax Saving 2013 y/e AIA WDA Tax savings 2014 y/e Eligible expenditure nil nil 250k nil AIA / WDA nil nil 250k nil Tax savings at 40% nil nil nil 100k nil 100k ACCELERATE CAPEX Incur 81,250 of expenditure in y/e 31 March 2013 (Pre-1 January 2013 and 56,250 post 1 January 2013, or all of the 81,250 post 1 January 2013) AIA WDA Tax Saving 2013 y/e Incur 168,750 of expenditure in 31 March 2014 AIA WDA Tax savings 2014 y/e Eligible expenditure 81,250 nil 168,750 nil AIA / WDA 81,250 nil 168,750 nil Tax savings at 40% 32,500 nil 32,500 67,500 nil 67,500 In the above example, the AIA generates a total of 100k tax savings in both scenarios, but by incurring part of the expenditure on or before 31 March 2013 the sole trader has brought forward 32,500 of tax savings for the 2013 y/e. For the purpose of this example the AIA has been apportioned on a monthly basis for simplicity.

5 Example 3: Deferring Expenditure Sole trader has a 31 March year end (y/e). Following the introduction of the temporary increase to AIA he is planning to replace numerous machines at a cost of 250k. These are the main pool assets eligible for Writing Down Allowances (WDAs) at 18%. No other capital expenditure is planned in the next two years. He plans on purchasing before 31 March 2013 y/e to obtain the AIA. The sole trader pays income at 40%. PLANNED CAPEX Eligible expenditure 250k of expenditure in January to March 2013 in y/e 31 March 2013 No expenditure in the y/e March 2014 AIA WDAs Tax Savings AIA WDAs Tax savings 81, ,750 nil 138,375 ( 168,750 WDA 30,375) Total tax savings for the 2 years AIA / WDA 81,250 30,375 nil 24,908 Tax savings at 40% 32,500 12,150 44,650(1) nil 9,963 9,963(2) 54,613(1+2) DEFER CAPEX Eligible expenditure 81,250 expenditure incurred in March 2013 Incurs 168,750 expenditure in y/e 31 March 2014 AIA WDAs Tax Savings AIA WDAs Tax savings 81,250 nil 168,750 nil Total tax savings for the 2 years AIA / WDA 81,250 nil 168,750 nil Tax savings at 40% 32,500 nil 32,500(3) 67,500 nil 67,500(4) 100,000(3+4) 81,250 is the maximum AIA which would have been available had there been no change in the AIA amount and the amount eligible to Writing Down Allowances As the 31 March accounting period straddles 01 January 2013 the maximum AIA (which in this example is 81,250) is restricted. To maximise the benefit of the AIA, he should defer some of the expenditure into the following accounting period. For the purpose of this example the AIA has been apportioned on a monthly basis for simplicity. Would you like to find out more? If you would like to find out more about how this potential tax relief could be best applied to any capital expenditure you may be planning, please don t hesitate to get in touch. The above is based on our understanding of current legislation. Before entering into any finance agreement you should seek the appropriate financial tax advice.

CAPITAL ALLOWANCES.

CAPITAL ALLOWANCES. CAPITAL ALLOWANCES Capital s Overview The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However tax relief is available on certain capital expenditure in the