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The best time ever to buy equipment for your business?

From a tax point of view, there has never been a better time to invest in capital equipment for use in a business.

The Annual Investment Allowance (AIA) is a 100% allowance for tools and equipment used in your business, capped at an annual amount (see below).  Broadly, all qualifying expenditure within this capped amount can be written off against taxable profits for the period in which the expenditure takes place.  Expenditure over the capped amount only attracts writing down allowances at the relatively miserly rates of 18 per cent or 8 per cent, depending on the nature of the assets bought.

The Finance Act passed in July confirms that, from April 2014 (1 April 2014 for Corporation Tax and 6 April 2104 for Income Tax), the AIA threshold has been increased from £250,000 to £500,000 per year up to 31 December 2015.

The plan is that the relief will return to its pre-January 2013 level of just £25,000 from 1 January 2016.  So all businesses should be looking at their strategic and financial plans hard over the coming 16 months, and making sure they take best advantage of this window of opportunity.

AIA is available to most companies, trading individuals and partnerships.  It can be applied to many of the assets bought and used in the business, such as machines, tools, office equipment, building fixtures, computers, vans and lorries.  Sadly, it cannot be claimed on cars.

If an accounting period straddles 1 or 6 April 2014, we have to make a pro-rata calculation of the cap thresholds.  For example:

A company prepares accounts to 30 September.  For the year to 30 September 2014, the limit will be:

  • October 2013 to March 2014 – 6/12 x £250,000 = £125,000
  • April 2014 to September 2014 – 6/12 x £500,000 = £250,000
  • Total £375,000

BUT…  the timing of the expenditure is critical.  For expenditure incurred before 1 or 6 April 2014, the maximum allowance will be the AIA that would have been due for the whole of the accounting period if the increase in AIA had not taken place.  This means that the above company can receive relief on up to £250,000 expenditure in the six months period to 31 March 2014.

In our example, any balance in the overall threshold can then be spent in the period between 1 April 2014 and 30 September.  So if the company has no qualifying expenditure in the first six months period, the full £375,000 will still be available for expenditure between 1 April and 30 September 2014.

When we get to 2016, the same company will have an AIA entitlement as follows for the year to 30 September 2016:

  • October 2015 to December 2015 – 3/12 x £500,000 = £125,00
  • January 2016 to September 2016 – 9/12 x £25,000 = £18,750
  • Total £143,750

However, most of the tax relief will be given only if the expenditure is incurred in the three months before 1 January 2016. The maximum amount of relief for expenditure incurred in the period 1 January 2016 to 30 September 2016 will be just £18,750.

Clearly, for significant levels of investment, careful planning will be required to get the timing right.

 

 

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