Business Tax, capital allowances, Personal tax, Tax Relief

Understand the caveats to enhanced Annual Investment Allowance (AIA)

By Lesley Stalker

If your business is planning to invest in new equipment over the coming 12 months, you will probably be aware of the very generous temporary increase to the Annual Investment Allowance (AIA). From April 1st 2014 until 31st December 2015, the maximum amount that can be written off in the first year of expenditure is £500,000. Then after the end of this period, AIA is expected to reduce to £25,000, although this may change. The opportunity to benefit from the AIA enhancement is available to almost any business structure, whether they are chargeable to corporation tax or income tax, but it does not include mixed partnerships (comprising both companies and individuals) or trusts.This enhancement clearly offers an excellent opportunity to purchase new assets with reduced financial exposure and get a significant amount of tax relief. Where a business needs to make a ‘generational spend’ to replace existing machinery, which happens, say, every 15 years for example, it may be worth bringing forward the expenditure to take advantage of extra tax relief. But the timing needs to be right and there are caveats to consider, as we discuss in this article.

The first point to be aware of is the potential impact to AIA of the businesses’ accounting period. If the businesses’ chargeable accounting period straddles a date when the AIA limits change(i.e. 1st or 6th April 2014 or 31st December 2015), there is an impact on the maximum AIA available in that accounting period. For most businesses, the start and end dates of the AIA time period will inevitably span multiple accounting periods and so affect the amount of AIA available.

For example, although the AIA limit for expenditure between 1st April 2014 and 31st December 2015 is £500,000. ,where a business has an accounting period that straddles 1st April 2014, or 31st December 2015, or is for a period other than a year, a calculation of the AIA that is available for that accounting period needs to be undertaken. If, for example, the accounting year ends on 31st December 2014, the accounting period (for AIA purposes only), needs to be split into two periods: 1st January 2014 to 31st March 2014 when the AIA limit was £250,000; and 1st April 2014 to 31st December 2014 when the AIA limit is £500,000 AIA.

It is also important to be aware of when the expenditure is deemed to have been incurred. The normal rule is that the cost is incurred on the date when the obligation to pay becomes unconditional (eg when the asset is delivered or in some cases when the order is placed).

However there is an exception (to stop advantage being taken of the new rules) which applies where there is a gap of more than four months between the date on which the obligation to pay becomes unconditional and the date on which payment is required to be made. If this applies then the expenditure is not treated as incurred until the date on which payment is required to be made.

The other factor to consider is how the purchase is being financed and when the equipment will actually be put to use. If you are financing the cost with hire purchase (HP), this may affect your entitlement to full AIA tax relief depending on the nature of the leasing contract and the date on which the asset is brought into use For example, if there is an HP agreement in place, and the asset is immediately brought into use within the business, AIA relief is claimable by the lessee (buyer) immediately and tax relief can also be claimed on any interest charged. In this instance, AIA is given in the same way as if a cash purchase is made and ownership is deemed from the beginning, even though the rental is payable over the term of the HP agreement.

However, this does not apply for leasing contracts where the assets acquired entitle the lessor (seller) to claim capital allowances. Any business considering this method of finance should check with a tax advisor whether the entitlement to AIA will be available.

For more information on capital allowances and using the annual investment allowance (AIA) contact Anne Eager by emailing ae@rjp.co.uk.

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