Catax review the key aspects surrounding HMRC’s incentive for investment.
The annual investment allowance (AIA) is an accelerated form of capital allowances which allows taxpayers to offset the cost of qualifying plant & machinery at a rate of 100% in the year of purchase. Introduced in April 2008, it replaced the first year allowance incentive which offered a less generous write-down rate of 40%.
The AIA is available to the majority of taxpayers with the only notable exceptions being trusts and mixed partnerships (i.e. those with a corporate member). Groups of companies must share a single allowance, but how the AIA is allocated between the groups is entirely flexible. Expenditure on cars is not eligible for the AIA, and neither is plant acquired as a gift.
It is not possible to claim the AIA retrospectively, i.e. the chargeable period for the year of acquisition must remain open for amendment. For this reason, it is essential that capital expenditure is reviewed at an early stage to accelerate any available tax relief.
Annual Rates / Transitional Rules
Initially introduced with an upper limit of £50,000, the maximum AIA has since been revised at regular intervals in order to reflect each government’s agenda.
There has been a stark difference between these rates over the years, with the highest cap (£500,000) representing a twenty-fold increase on the £25,000 set just two years prior in 2012. This unpredictability, together with the complex rules surrounding pro-rata adjustments, has led to confusion amongst taxpayers and their advisors alike.
Considering the AIA available for a chargeable period is key when planning large investments as the example below illustrates.
Example – company with a financial year ending 31st March 2016
As the maximum AIA changed on 1st January 2016 this period will need to be divided in two to calculate the available amount.
1st April 2015 – 31st December 2015: £500,000 x 9/12 = £375,000
1st January 2016 – 31st March 2016: £200,000 x 3/12 = £50,000
The maximum AIA available for this period is £425,000 (i.e. £375,000 + £50,000). However, crucially the amount of AIA available for the latter three months of the period will be capped at just £50,000.
Click here for our AIA tables containing worked calculations for both income and corporation taxpayers.
When a significant acquisition is planned it is essential that the availability of the AIA is considered, as any balance exceeding the available AIA will be limited to the standard writing-down rates of 18% and 8% depending on the type of plant.
Fortunately, the most recent adjustment in AIA to £200,000 (with effect from 1st Jan 2016) has been announced as a permanent measure by HMRC so we should be rid of any additional complications at least for the near future.
It is equally important to allocate the AIA in the most tax-efficient manner, so that any special rate items (8% WDA) are given priority over general pool plant (18% WDA). Taking advantage of other incentives such as the Enhanced Capital Allowances scheme for ‘green technology’ is also important as these allow for 100% tax relief without utilising the AIA.
For further guidance on the annual investment allowance and other capital allowances topics, ICAEW members can access our technical portal here.