The Chancellor, George Osborne, announced in his emergency budget on 22 June 2010 the reduction of the Annual Investment Allowance (AIA) from £100,000 per annum to only £25,000 per annum from 6 April 2012 for unincorporated businesses, and from 1 April 2012 for companies. Planning is required now to take advantage of the current level of allowance whilst it remains.
The AIA is a 100% deduction from taxable profits for qualifying expenditure on plant and machinery. It can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non residential property business or a furnished holiday let.
In the current fiscal year, qualifying capital expenditure of up to £100,000 by a business could qualify for 100% deduction in calculating taxable profits. This is reducing to £25,000 per annum from April 2012.
As with many tax matters, timing is everything and there are some hidden dangers in the legislation. This is best explained by a number of examples, based on a limited company spending £50,000 on a new piece of equipment (examples 1 to 3).
1). If the company has a year-end of 31st March, 2012 and the obligation to pay for the equipment becomes unconditional before 31st March, 2012 then it’s all straight-forward. The company claims the £50,000 AIA against trading profits.
2) If the company has a year-end of 30th September, 2012 and the obligation to pay for the equipment becomes unconditional before 31st March, 2012 then it’s all still fine. The company is entitled to a time-apportioned AIA of £62,500 and claims the £50,000 AIA against trading profits.
3) However, If the company has a year-end of 30th September, 2012 and the obligation to pay for the equipment becomes unconditional AFTER 31st March, 2012 then THERE IS A PROBLEM. The company is still entitled to a time-apportioned AIA of £62,500 BUT the legislation (Finance Act, 2011 s11(7) limits the AIA in the period after 31st March, 2012 to the amount calculated for the accounting period. In this case, the AIA would be limited to half of £25,000 = £12,500. In terms of the tax bill, this delay in making the investment would increase the 2011/12 tax liability by £6,075.
4) Now ramming my point home. If your limited company has a 30th April, 2012 year-end (like mine) then the tax cost can be signficant even on small figures. Let’s say you invest £10,000 on 30th April, 2012. The legislation restricts the AIA available on this to 1/12th of £25,000 = £2,083. If you invested on 31st March, 2012, AIA of £10,000 would be available. The delay in the investment results in an increased tax bill of £1,266.
Sorry to bombard you with figures. Really my message is :
1/. Invest before 31st March, 2012 to take advantage of the current £100,000 AIA limit
2/. Be very careful about the tax implications of making investments between 1st April, 2012/6th April, 2012 (companies/sole traders and partnerships) and your year-end date. There are good reasons to bring investment forward before 31st March, 2012 or even delay until after your year-end date (if later than 31st March).
Please talk to your accountant or, preferably us, if you are planning to make a sizeable capital investment and need further advice.