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Annual Investment Allowance doubles to £500,000 in tax relief

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Date: Mon 09/Jun/2014, 13:18

Annual Investment Allowance doubles to £500,000 in tax relief

In a surprise move the chancellor announced in his March 2014 Budget a temporary increase in the Annual Investment Allowance (AIA) from £250,000 to £500,000 with it reverting back to £25,000 on 1st January 2016. 

This an important tax incentive which accelerates the tax relief so that 100% may be available in the first year, instead of claiming the usual annual 18% on a reducing balance. For many businesses emerging from the recession in the last six months or so, for the first time in a long time, respectable profits may have to be declared. The AIA presents an ideal opportunity to shelter those profits whilst reinvesting up to £500,000 in plant, machinery, commercial vehicles and even fixtures such as a generator (new or used). Depending on the business’ rate of tax it is an open invitation to secure the equivalent of a 20% to 45% subsidy. Better still – if you acquire the plant via a hire purchase agreement the acquisition, for tax purposes, is treated as if cash had been paid. 

Unfortunately it seems that some financial advisors have been slow in coming to terms with the AIA, particularly because this represents the 5th change since its introduction in 2008! The changes introduced in January 2013 made life particularly complicated because the changes happened mid –way through a tax year. In addition there seems to be some confusion in the Plant Hire sector with many Plant Hire businesses being advised that they are not eligible for the AIA. The seeds of this confusion may have been sown in April 2008 when First Year Allowances (FYA) were replaced by the AIA. Before 2008 many accountants had been caught out by HMRC disallowing FYA claims made on behalf of Plant Hirers because the business was supplying non-operated plant (plant supplied with an operator could claim the full FYA). This ruling was not carried over to the AIA so all businesses, including Plant Hire businesses, can claim the AIA – the only exceptions are Mixed Partnerships or Trusts (i.e. those in which a company is a member). 

What savings can be made?
Imagine the following scenario: in 2015 a Limited Company is rapidly approaching the end of its tax year and the accountant fears that a big tax bill is looming. Even after claiming all available business expenses, a profit of £500,000 remains, which would attract the 21% corporation tax rate and a tax bill of £105,000. The company’s financial year ends on the 31st March. 

The accountant explains that, if the business uses hire purchase to invest £500,000 in replacement plant which is delivered and available for use within the business by 31st March 2015, then the full £500,000 AIA will apply. Paying a 10% deposit (£50,000) and borrowing £450,000 over three years on hire purchase equates to a £200,000 outlay in the first 12 months, followed by £150,000 in each of the subsequent years (net of interest charges). 

Over half of the £200,000 expenditure in the first year has effectively been paid by HM Revenue & Customs
Not only that, but the company has managed its cash flow in an exemplary fashion – claiming the maximum £500,000 AIA but with an outlay of only £50,000 (the deposit) in the same tax year. Typically most hire purchase agreements are paid monthly in arrears so the first monthly payment would fall due at the end of April which is in the new tax year. Interestingly the actual interest element charged is itself 100% tax deductible. Paying £500,000 in cash on day one would only net the same AIA tax benefit. 

However, be warned because the above scenario is relatively simple to interpret. Different financial years that straddle the tax year and particularly when the temporary AIA enhancement ends on 31st December 2015 will result in very complicated calculations that will result in a lesser AIA being granted in that financial year. The chart below illustrates this by showing four different financial year end companies and how vital it is to spend the right amount within the right periods in order to maximise the tax benefits.

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