Annual investment allowance (AIA) is a relief that can be claimed on the cost of plant and machinery. Up to 100% of the costs can be claimed to help reduce the potential tax liability for that business. AIA can be claimed on plant and machinery that would normally go into the main rate pool or special rate pool within the capital allowance calculation (i.e. ovens, heating systems, computers etc.). Although this covers a variety of assets, there are a few items, such as most cars, where AIA cannot be claimed. In order to maximise the AIA, it should be used against those items within the special rate pool first (the items at a written down value of 8% instead of the usual 18%).
Current Annual Investment Allowance rates
The current maximum that can be claimed for AIA is £500,000. As introduced in the summer Finance Bill, this level will be reduced to £200,000 from the 1st January 2016. The amount was originally due to revert back to £25,000 but as a way to promote investment in businesses, it has now been set at a permanent level of £200,000. For any business or company that have chargeable accounting periods that straddle the date of change, the AIA for each period will need to be time apportioned. For example, if a company’s accounts are from the 1st August 2015 to the 31st July 2016 the apportionment would be as follows:
- 01/08/15 – 31/12/15 = 5/12 x £500,000 = £208,333
- 01/01/16 – 31/07/16 = 7/12 x £200,000 = £116,667
- Total for the accounting period = £325,000
Although this amount is for the entire accounting period, the maximum that can be claimed is still determined by the maximum applicable at the time that the cost is incurred. Any expenditure up to the 31st December 2015 will have a maximum of £500,000. Obviously in this instance it would be the £325,000 calculated as above. However, if anything is purchased from 1st January 2016, the most that can be claimed with the reduced limit is the £200,000 (restricted to £116,667 in the above example).
If this company is considering buying a piece of machinery to cost £300,000 in the period ended 31 December 2015 and they have had no other expenditure within the period, the full amount would be available to claim against the AIA. However, if they were to wait to buy the item until after 1 January 2016, then the maximum claim available is £116,667. The remaining £183,333 (Cost £300,000 – AIA £116,667 = £183,333) would be put into the capital allowances computation as an addition to the general pool and written down at 18% (or into the special rate pool at 8% dependent on the type of asset).
If the company waited until the year ended 31 July 2017 to buy the same machinery, the company would be able to utilise the full AIA band of £200,000 leaving only £100,000 to transfer into the capital allowance pools to claim writing down allowances against.
This revised maximum is likely to affect any trade that is planning to invest in new equipment. As the allowance was due to change to £25,000, this may be all that businesses had accounted for. As the level has now increased, the opportunity arises to spend more and retain tax efficiency. For the businesses that were planning on investing into new plant or machinery, they will find it beneficial to incur the expenditure prior to the 31st December.
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