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November 2017
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Annual Investment Allowance reduction from January 2016


The Annual Investment Allowance provides a tax write off against profits for expenditure incurred on plant and machinery by businesses and owners of commercial property.

In the Summer Budget this year, the Chancellor announced a reduction in the amount of AIA available from £500,000 to £200,000.


Changes to the AIA – key dates
The amount of the AIA was increased to £500,000 from 1 April 2014 for companies, or 6 April 2014 for unincorporated businesses until 31 December 2015. The AIA will be reduced to £200,000 for expenditure incurred after this date.

What happens if the accounting period of the business straddles 1 January 2016?
A pro-rata calculation of the maximum entitlement is required. The maximum allowance for that period is the sum of:
  • The maximum AIA entitlement based on the £500,000 annual cap for the portion of the accounting period falling before 1 January 2016; and
  • The maximum AIA entitlement based on the £200,000 cap for the portion of the accounting period falling on or after 1 January 2016.


Example
A company makes up its accounts to 31 March annually. For the year to 31 March 2016, the limit is calculated as follows:
April 2015 - December 2015 9/12 x £500,000 = £375,000
January 2016 – March 2016 3/12 x £200,000 = £50,000
Total = £425,000

Does it matter when the expenditure is incurred in the accounting period?
Yes it does. For expenditure incurred before 1 January 2016, there is a limit to the maximum figure available. The maximum allowance is the AIA in the example above, ie £425,000.

However, if expenditure is incurred on or after 1 January to 31 March 2016, the maximum amount of relief will only be £50,000.

Alternatively the business could defer its expenditure until after 31 March 2016. In the accounting period to 31 March 2017, the AIA will be £200,000. However tax relief will have been deferred for a full year.

Further points to be aware of
  • AIA is not available for expenditure on cars
  • Certain businesses are not entitled to any AIA
  • In some situations, a business may not be entitled to the AIA as shown above as the AIA limits may need to be shared with other businesses which are under common ownership
  • There are special rules for determining the date of when capital expenditure is incurred for tax purposes in some circumstances. Please contact us if a contract is being signed with a credit period of more than four months, or a hire purchase agreement is being entered into.


What to do
As you can see, the timing of the expenditure around 1 January 2016 is critical. If you are in any doubt as to what this change will mean for your business please get in touch with us as soon as possible.