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Annual Investment Allowance to be lowered from 31st December 2015

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Date: Wed 02/Sep/2015, 16:02

SKM Asset Finance highlights that a £500,000 tax saving opportunity is drawing to a close.

In the 2015 Summer Budget the Chancellor announced that the Annual Investment Allowance will be set at £200,000 from January 2016 and that corporation tax rates will fall to 19% in 2017 and 18% in 2020. Time is therefore running out if you would like to benefit from the enhanced AIA of £500,000 whilst gaining maximum tax relief against the current 20% rate of corporation tax. The £500,000 AIA tax relief is available for capital expenditure on new or used plant, machinery and commercial vehicles (not cars) purchased until 31st December 2015. This is an important tax incentive which accelerates the tax relief so that 100% of eligible expenditure can be offset against taxable profits in the first year instead of taking up to 12 years to reclaim 90% of the original cost using the normal 18% annual writing down allowance. In effect for every £1 spent the government will give you £1 back in the form of relief against your taxable profits. The net benefit will depend on the rate of income tax or corporation tax that business pays – which could be between 20% and 45% it is th equivalent of a subsidy to encourage business to invest in plant and machinery. However the net potential tax savings for corporation tax payers will also fall as corporation tax drops.

Capital expenditure via a Hire Purchase (HP) agreement is also eligible for exactly the same AIA, just as if you had paid cash, but you will also gain a terrific cash flow advantage. Potentially your business gain up to £500,000 in tax relief after only having paid the deposit and the interest charged is also 100% tax deductible. All businesses can claim the AIA – the only exceptions are Mixed Partnerships or Trusts (i.e. those in which a company is a member) If you have not already planned how to maximise the benefit speak to your accountant or finance director now. If your Financial Year end is March of your Tax Year End is April then your £500,000 AIA has already dropped to £375,000.

 

Timing is Critical

Proper advice is needed because different financial years that straddle either the tax year or calendar year end may result in complicated calculations that could result in a lesser AIA being granted in that financial year.

The chart below illustrates the maximum amounts available 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. Given the lead times for some machinery, from order to delivery, this also needs to be carefully factored in to your buying plans. Get the timing and / or the amounts wrong and your business could either miss out on available tax relief or worse still, end up paying far more tax than is required. For example – a March year end company with adequate profits spending £375,000 on 31st December 2015 on eligible will potentially save £75,000 in the first year. Do the same thing on 1st January 2016 and the net tax saving plummets to only £21,700 or a loss of £53,300 in potential tax savings in year one. Even if the company kept the machine for ten years and claimed the annual 18% writing down allowance it would still be £11,431 worse off - a situation exacerbated by the falls in corporation tax rate during the period.

Other factors being equal , if your business is contemplating purchasing eligible plant or commercial vehicles in the near future, there are some strong tax-based and cash flow arguments to carefully plan these purchases before the end of your financial year and certainly before 1st January 2015 when the reduced allowance of £200,000 will come into effect. Add in a likely rise in interest rates next year and the argument gets even strong to change machinery now.

Article originally written by JCB Finance Ltd



     
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