Businesses should time their capital expenditure to get the most tax benefit from the AIA increase to £500,000
In an effort from the Government to provide more tax aid to businesses, Chancellor George Osborne has doubled the Annual Investment Allowance (AIA) threshold to £500,000 from April 2014 until December 2015, after which it will return to £25,000. This measure is designed to stimulate business investment in the economy by providing an increased time-limited incentive for businesses to invest in plant or machinery.
The AIA, available for most businesses and partnerships in the UK, is effectively a 100% first-year allowance for business expenditure on almost all plant or machinery. The AIA can be prorated for short and long periods, and there are transitional rules for periods spanning the operative dates and rates of allowance.
As the AIA can be used against either expenditure qualifying for the special rate pool of 8% or the main pool at 18%, advice should be sought to obtain the most tax efficient use of the AIA. Also, where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief under the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the 18 per cent or 8 per cent rate respectively.
Whilst the main intention of the AIA is as an incentive to investment, the AIA also provides a major simplification of the tax system for smaller businesses. As 95% of UK businesses invest less than £25,000 a year in plant or machinery, the vast majority of businesses will no longer have to make WDA calculations every year and keep a record of the pool of unrelieved expenditure to be carried forward.
For smaller and medium sized businesses the AIA should not be ignored as it can significantly help the cash flow of a business by providing maximum tax savings in the year of expenditure.
Posted May 2014