Tax relief for investment in business assets
In the 2018 budget Phillip Hammond announced the most generous Annual Investment Allowance increase ever. January 2019 marks the point at which the new £1 million allowance limit comes into force.
The Annual Investment Allowance delivers 100% tax relief in the year of purchase on the cost of a wide range of assets, including plant and machinery, LCVs, HGVs and other commercial vehicles. The allowance is available for the vast majority of business structures; only partnerships where one of the partners is a company or another partnership are excluded.
The Annual Investment allowance has long been a tool used by the Government to influence the level of capital investment being made by businesses, and it has fluctuated considerably over the last decade, from a low of just £25k in 2012. The latest increase is a clear signal that the Government hopes to encourage accelerated asset investment in the near term.
The £1 million limit is due to last for two years, up until 31st December 2020, giving organisations a significant window to acquire qualifying assets with immediate tax relief.
Better still, for businesses unwilling or unable to commit large amounts of capital cash, the same allowances are also available on items financed through Hire Purchase and Contract Purchase arrangements. The allowance is available on all payments yet to be made for the purchase of the asset, excluding payments for interest charges.
Timing of investments is critical
For a business to maximise the advantages to be gained through the Annual Investment Allowance increase, it’s important to factor in the dates of their financial year. As the Annual Investment Allowance runs for calendar years, there will inevitably be overlap periods for all organisations that don’t run a January to December financial period. This means that investments need to be made at the right times to take full advantage of the £1 million allowances.
For example, in January 2019 a business operating with a financial year running 1st July to 30th June, will have six months (£500k) of this financial year’s allowance available to it for immediate tax relief. The residual £500k allowance will become available in the business’ next tax year, starting 1st July.
Again, financing assets using hire or contract purchase gives organisations greater flexibility to time the acquisition of assets in a way that maximises their tax efficiency, without worrying about the impact on cashflow and reserves.
Commercial vehicle imperative
For organisations operating LCVs and HGVs, particularly in London, time is ticking before the introduction of the first Clean Air Zones (CAZ). These initiatives will penalise the use of older, more polluting vehicles. London’s Ultra Low Emission Zone (ULEZ) comes into force on 8th April 2019, with charges of £12.50 a day for LCVs and £100 for larger vehicles that don’t meet the specified Euro standards. Birmingham has also announced that CAZ charges will begin from January 2020, with many other UK cities currently working on similar plans. To learn more about the plans for Clean Air Zones click here.
With this in mind, commercial fleet operators should be looking to take advantage of the enhanced AIA rates if they intend to replace existing vehicles that don’t meet the latest emission standards.
For small businesses operating LCV in London, there’s the added incentive of the Mayor’s recently announced van scrappage scheme. This will provide yet-to-be-defined financial incentives for organisations with less than ten employees, to scrap older, polluting vans and replace them with new vehicles exempt from the ULEZ charge. For more information on the scheme click here.
What about cars?
Purchases of cars are not eligible for the Annual Investment Allowance, but those bought and used by a business are eligible for capital (or writing down) allowances. The rate of capital allowance for a car depends on its CO2 emissions – for more information on the rates and how to claim the allowances available click here.
Get the right advice
Maxxia’s experts can provide private and public sector organisations with advice and guidance on the most appropriate form of asset finance for their requirements, including hire and contract purchase arrangements, to take maximum advantage of the Annual Investment Allowance increase . Click here for details on how to contact us for a no obligation discussion.
As with all taxation matters, it is vital to consult with your tax advisor or accountant before making any investment decisions.