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The changes in Annual Investment Allowance

From January 2013, the amount business owners are able to write off as tax-deductible capital expenditure in the year of purchase will increase from £25,000 to £250,000. This is a massive boost and far more significant than the previous government’s attempt at encouraging investment amongst business owners.

Back in April 2010 the relief was £100,000, which was also generous, but not perhaps quite large enough to enable a lot of companies to write off all their capital purchases in the first year. This new limit however will achieve that in a single hit – the expectation is a lot of businesses will take advantage and ‘upgrade’ their capital spend.

Apart from being an opportunity for businesses to tax effectively revamp their own facilities, this is also a clever move by the government to simultaneously help support suppliers and manufacturers – could this be a marketing opportunity for your business to help sell its own products by reminding customers of this tax advantage?

Just to be clear, below are a few of the questions most frequently asked about the AIA and capital allowances.

What is the AIA?

The AIA is a kind of capital allowance, which offers tax relief at 100 per cent on qualifying expenditure in the year of purchase. The maximum you can deduct from your taxable profits is now set to be £250,000. This pro-rates for short or long periods, and also for periods that span the operative dates and rates of allowance.

Who can claim?

Almost any entity, provided the business activity satisfies one of these criteria: trading; commercial property letting; office or employment; or leasing. The only business structures which are not eligible for the AIA are mixed partnerships (that is, partnerships comprised of both individuals and companies) and trustees.

Is there a catch?

There are a few exclusions. Splitting a business with related interests into a group of companies is a well-known tax planning strategy, but it won’t help in the case of the AIA, since the subsidiaries would only get £250,000 between them. This is also the case for related companies under common control (‘related’ companies are those that share premises, or carry out related activities). For companies with a group structure, careful tax planning is important to calculate the best way to split the allowance amongst related businesses.

Are there any exemptions?

Yes, there are assets that would not qualify for the allowance, such as cars, and you should seek advice accordingly.

What about green technologies?

Investment in certain green technologies is eligible for enhanced capital allowances (ECA). These are in addition to the £250,000 allowance and, like the AIA, would be eligible for 100 per cent tax relief in the first year. A set of qualifying technologies is available on the ECA website.

What happens after the first £250,000?

Generally speaking once the investment goes beyond the AIA threshold, a flat rate of 18 per cent is applied to apportion the investment over subsequent years. So, if a firm buys £275,000 worth of new IT systems, it can allocate the first £250,000 of expenditure against the AIA and the remaining £25,000 would achieve tax relief at 18 per cent a year on a reducing balance.

What about expenditure that doesn’t qualify for the AIA?

Some types of expenditure only qualify for a writing down allowance of 10 per cent. This includes so called ‘integral features’, for instance electrical or cold water systems, thermal insulation and long-life assets.

What if I have to repair or replace an asset?

Spending on repair or replacement is normally an allowable deduction against income and so full tax relief is given immediately. However, if the repair or replacement costs in the last 12 months are greater than half of the total cost of replacing an asset, the spending is treated as capital expenditure. For example, if a business spends £3,000 in the last 12 months repairing or replacing parts of its air conditioning system, but the total cost of replacing the aircon is £5,000, then the £3,000 would be treated as capital expenditure and qualify for allowances at 10 per cent.

Is this worth the hassle?

The increase to the AIA marks a big change for businesses and we believe the new generous allowance presents rather a good opportunity for businesses wanting to make any investments to be as tax efficient as possible.

As ever if you need to know more, please do not hesitate to contact your usual McLintocks Partner.