The annual investment allowance (AIA) allows expenditure up to a set limit on most types of plant and equipment (but not cars) to be written off for tax purposes in the first year. It is very useful, because full tax relief for such expenditure might otherwise not be obtained for many years.
The maximum AIA up to 31 December 2015 is £500,000. It was due to drop to £25,000 next year, but we now know that it will be £200,000 from 1 January 2016.
Don’t ignore the change
You might have thought that if you spend less than £200,000 a year on qualifying assets you could ignore the change because it would have no effect on expenditure you incur in 2015.
Unfortunately, the transitional rules that apply whenever the AIA limit changes are fiendishly complex; the reduction in the AIA could indeed restrict tax relief on your 2015 expenditure and could conceivably affect a business that spends less than £20,000 a year.
If your year end is 31 December, the position is clear; you can get full tax relief on expenditure of up to £500,000 in 2015 and up to £200,000 in 2016. With any other year end, an accounting period will straddle 1 January 2016 and will be called a ‘transitional period’.
The maximum AIA for a transitional period is a simple time-apportionment of the two relevant limits. For example:
|Year end||Maximum AIA for period|
|31 January 2016||£475,000|
|31 March 2016||£425,000|
|30 June 2016||£350,000|
|30 September 2016||£275,000|
However, there is a further restriction on the AIA that can be claimed in a transitional period for expenditure incurred on or after 1 January 2016. This is a simple time apportionment of the £200,000 limit. For example:
|Year end||Maximum AIA for post 1 January 2016 expenditure|
|31 January 2016||£16,666|
|31 March 2016||£50,000|
|30 June 2016||£100,000|
So if you wanted to claim the maximum £275,000 AIA for the year to 30 September 2016, you would have to spend at least £125,000 of it in the last quarter of 2015.
Action to take
Clearly, the timing of expenditure is crucial if your AIA claim is to be maximised. If you have a non-calendar year end, you need to ensure that your pre-1 January 2016 expenditure is sufficient. To establish the relevant amounts, you need to calculate the maximum AIA for your transitional period and, of that, the maximum amount you can spend after 1 January 2016.
As 1 January 2016 is not that far away, please talk to your usual RSM adviser, so that we can help you understand the effect of this change on your business and plan the timing of your capital expenditure. If you have no choice about the timing, other measures might be needed, such as changing your year end!