August 2015 - Annual Investment Allowance is a Permanent Fixture
The Chancellor announced in his Summer Budget that the Annual Investment Allowance (AIA), introduced as a temporary measure in April 2008 as a tax incentive for small businesses to invest in equipment and machinery, is here to stay.
The AIA allows businesses to obtain full tax relief for the cost of eligible plant and machinery (excluding cars) in the year of purchase. The value of the AIA has fluctuated throughout its brief life from £50,000 up to £100,000 before reducing to £25,000 which was deemed to be its base value. After a brief pause to catch its breath it was increased once to £250,000 and then again to a most generous £500,000.
The AIA was due to return to £25,000 from 1 January 2016 however in the Chancellor’s March budget he provided assurances that the AIA would not return to this rate and that this would be addressed later in the year.
True to his word he has now fixed the AIA at £200,000 from 1 January 2016. Whilst the decrease in value may not be good news to many it is undoubtedly better than the originally proposed £25,000 and continues to fulfil the original brief of incentivising small businesses to invest in capital equipment.
The historic and economically gimmicky variations in the value of the AIA should now be a thing of the past, allowing businesses to plan their capital expenditure and cash flows with more certainty than before. Gone are the days of monitoring each Budget in order to determine whether the AIA change meant that businesses may wish to advance or postpone their capital expenditure (when considered with commercial considerations), postponement obviously being the antithesis of the objective here.
How long the Government maintains this tax relief as a permanent fixture is no doubt open to debate.
A business with a non-December accounting year end will need to deal with one more transitional period in which the timing of capital expenditure must be considered. A business with an accounting year ended 31 March 2016 would be entitled to the following AIA:
• For the 9 months to 31 December 2015 the AIA would be £500,000 x 9/12 = £375,000;
• For the 3 months to 31 March 2016 the AIA would be £200,000 x 3/12 = £50,000;
• The total AIA would be £375,000 + £50,000 = £425,000; however
• If the business had eligible expenditure of £425,000 in the year, wholly within the first 9 months, it could claim AIA of £425,000;
• If the business had eligible expenditure of £425,000 in the year, wholly within the last 3 months, its AIA claim would be capped at £50,000.
In order to maximise AIA businesses which have accounting periods which straddle 1 January 2016 should therefore be considering the benefits of advancing their capital expenditure to 31 December 2015 or earlier.