Insights

When companies incur capital expenditure, tax relief can be available for the full cost of the asset in the period in which it is purchased if it is falls within the AIA, with expenditure exceeding these limits attracting tax relief at 18% or 8% annually on the reducing balance.

Since 1 April 2014, the AIA has been set at a very generous level of £500,000. From 1 January 2016 the AIA will reduce to £200,000. This is a significant reduction and business owners considering whether or not to make an investment in new qualifying capital equipment would be advised to review the timing of any potential capital expenditure, to ensure that they optimize the tax reliefs available and do not get their sums wrong and incur expenditure which does not attract AIA.

Calculating AIA across multiple accounting periods

What is important to understand is the way the annual limit is apportioned across an accounting period when there is a change to the AIA during the year. In many cases companies that want to use their allowance now whilst it is still at the current higher rate will have an accounting period that straddles the rate change, for instance, because their financial year end runs from 1^st April 2015 to 31st March 2016. Where this is the case the AIA available is calculated by apportioning the accounting period up to 31 December 2015 (ie 9 months) and 31 March 2016 (ie 3 months) and then the AIA available for each period is identified:

9/12 x £500,000 = £375,000

3/12 x £200,000 = £   50,000

ie a total AIA for the year of £425,000

Timing is everything to maximise tax relief

However the important point to be aware of is the timing of the expenditure. If £425,000 is incurred in the nine month period to 31 December, only £375,000 will qualify for the full write off; the remainder will attract tax relief at a reduced rate via writing down allowances. Similarly, only £50,000 of expenditure incurred in the three month period to 31 March would qualify for the AIA.

This is an important point to note as a company looking to bring forward its capital expenditure to make the most of the higher level of AIA needs to be aware that its both the timing and the level of the expenditure that determine the amount of AIA that can be claimed.

With regard to what is deemed to be date of expenditure for capital allowance purposes, the asset is deemed to be purchased (ie the cost incurred) on the date when the obligation to pay becomes unconditional. In most instances this will be the date the goods are delivered but for some items, where the asset will be built to order, e.g. for construction projects, it will be the date the project or asset’s certification is signed. In this latter scenario, the obligation to pay becomes unconditional when each stage of the work is certified as completed.

Equally, some goods will be delivered before the obligation to pay becomes due. If payment is required (or made) more than four months after delivery then the expenditure is not treated as being incurred until payment is made, therefore pushing the deemed date of acquisition back to a later date.

Recently, HMRC has increased its focus on anti avoidance and care should be taken to ensure that a contract entered into in order to apply the maximum annual investment allowance doesn’t fall foul of the anti avoidance legislation. Artificially creating an obligation for payment prior to delivery may well fail to secure a tax advantage.

Qualifying conditions for AIA to apply

Other qualifying conditions apply when considering how new assets will be financed, as the purchaser must have legal ownership of the asset in order to be able to qualify for capital allowances and claim the AIA. This means the items must either be purchased outright, or leased through a contract whereby the purchaser owns the items outright at the end of the purchase agreement e.g. hire purchase. If the item is acquired under a finance lease and the purchaser does not own the item outright at the end of the contract, capital allowances cannot be claimed.

So, this year, waiting for the January sales won’t apply if you are planning a capital investment. The enhanced £500,000 annual investment allowance will disappear after 31^st December and therefore we would recommend the sooner you start looking at the timing of your capital expenditure the better, to make sure the current levels of AIA aren’t wasted.

If you are thinking about making a capital investment and want to understand how you can claim the annual investment allowance please contact Victoria Rampton by emailing vr@rjp.co.uk.