New annual investment allowance limit gives certainty over plant and machinery purchases
Amongst a number of key announcements in Chancellor George Osborne’s Summer Budget, the first by the Conservative Party for 18 years, there was a bright note for businesses planning to invest in new plant and machinery.
The Chancellor announced that the Annual Investment Allowance (AIA) will be set permanently at £200,000 from the beginning of January next year, providing certainty for businesses over their spending plans.
While not as high as many firms were hoping for, as the current interim limit is £500,000, the news at least removes the uncertainty surrounding this important tax break, as it was expected to revert to £25,000 from January.
Now many businesses will have to move quickly if they want to take full advantage of the higher £500,000 limit before the end of the year. Major investments, like a complete IT hardware refit, or expensive or customised machinery, will have to be ordered now in order to be ready for use by the deadline at the end of December.
The Annual Investment Allowance provides a 100% deduction for the cost of most plant and machinery, although not cars, purchased by a business up to an annual limit and is available to most businesses.
Two years ago, the threshold for the AIA stood at just £25,000 per annum. Then, in 2013-14, the Government took the decision to increase this limit to £250,000 and then doubled it again to £500,000 for an extended temporary period until the end of December 2015.
This means that, in the current tax year, any business that purchases its business assets outright can offset the value of the assets up to a maximum of £500,000 directly against their taxable profits in that year – a significant incentive indeed for any business looking to make substantial investment in their business.
However, the AIA was widely expected to be reduced to £25,000 from the start of next year, leading to purchasing uncertainty for many businesses.
Now, following the Chancellor’s announcement, the uncertainty has been removed and the level of the maximum AIA will be set permanently at £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
New transitional rules
For businesses with accounting periods spanning 1 January 2016, there are now new transitional rules for calculating the maximum Annual Investment Allowance for that period.
There are two important elements to the rules:
- a calculation which sets the maximum AIA available to a business in an accounting period which straddles 1 January 2016
- a further calculation which limits the maximum AIA relief that will be available for expenditure incurred from 1 January 2016 to the end of that accounting period.
So for example, if a business has a year end of March 31, the maximum AIA in the accounting periods to 31 March 2016 will be:
Nine months to December 2015 £500,000 x 3/4 £375,000
3 months from January 2016 £200,000 x 1/4 £50,000
Total annual AIA £425,000
This is still a generous figure. However, if expenditure is incurred between 1 January and 31 March 2016 the maximum amount of relief will only be £50,000 as shown. Alternatively, a business could defer its capital expenditure until after 31 March 2016 when it will be able to benefit from the full £200,000.
But that means that tax relief will have been deferred for a full year and the ability to utilise the much higher limit of £500,000 will have been lost.
One option may be to shorten the current financial year to six months’ duration to coincide with the calendar end of this year, and then establish a new accounting period on a calendar year basis thereafter.
Six months from July 1, 2015 to December 31, 2015
Available AIA £500,000
Twelve months from January 1 2016 to 31December 16
Available AIA £200,000
This allows businesses to achieve full tax relief on all capital purchases, excluding cars, of up to £700,000 over the next 18 months, which is a major boost for any companies looking to invest in their business during that period.
However, this may not be practical for some businesses to be able to change their accounting dates at such short notice. But with a prize of that magnitude available, it may be well worth considering.
What counts as plant and machinery
For AIA purposes, plant and machinery includes:
- items that you keep to use in your business
- costs of demolishing plant and machinery
- parts of a building considered integral, known as ‘integral features’
- some fixtures, such as fitted kitchens or bathroom suites
- alterations to a building to install other plant and machinery – this does not include repairs
Integral features are:
- lifts, escalators and moving walkways
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems
- electrical systems, including lighting systems
- external solar shading
What doesn’t count as plant and machinery
You can’t claim capital allowances on:
- things you lease – you must own them
- buildings, including doors, gates, shutters, mains water and gas systems
- land and structures, such as bridges, roads, docks
- items used only for business entertainment, such as a yacht or karaoke machine
If you would like to find out more about the new AIA limits announced in the Summer Budget covering purchases of plant and machinery, or the asset finance solutions that we can provide, then please get in touch.