In the Summer Budget 2015, the Chancellor announced that the Annual Investment Allowance (AIA) available to businesses on qualifying expenditure, would fall from £500,000 to £200,000 in January 2016.
Since 1 April 2014 (6 April 2014 for businesses subject to income tax), businesses have been able to claim a 100% deduction on their first £500,000 of qualifying plant and machinery expenditure against taxable profits of the same period.
The £500,000 AIA level was due to drop permanently to £25,000 next year but the Summer Budget confirmed that the AIA will instead be set permanently at £200,000 per annum from 1 January 2016 onwards.
It should also be noted that for companies with accounting periods straddling 31 December 2015, transitional rules will have to be applied in calculating the maximum AIA for that period. The maximum allowance that can be claimed for capital expenditure incurred prior to 1 January 2016, is the time apportioned AIA (£500,000) from the start of the chargeable period to 31 December 2015 plus the time apportioned AIA (£200,000) from 1 January 2016 to the end of the chargeable period.
For example a company with a 31 March 2016 financial year end would be entitled to AIA relief on the first £375,000 in the 9 months to 31 December 2015 plus the first £50,000 for the 3 months to 31 March 2016 on qualifying expenditure made prior to 1 January 2016.
Any expenditure incurred on or after 1 January 2016 would be limited to the time apportioned maximum AIA relief of £200,000 from the 1 January 2016 to the end of the chargeable period. In other words, the maximum AIA that can be claimed for expenditure incurred from 1 January 2016 by a company with a 31 March 2016 financial year end would be £50,000. The impact of this being a reduction in the amount of AIA relief that can be claimed by a business falling from £425,000 to just £50,000 depending on the timing of the expenditure.
As such, if you are planning any significant capital expenditure and are worried that this decrease may impact you and your business, please let us know and we’d be happy to chat with you about it.
Katie Taylor, LLB, ACA, Business and Tax Adviser.