Annual Investment Allowance (AIA) is effectively a 100% first year allowance for business expenditure on qualifying plant and machinery and this article concentrates on the movements in the maximum AIA and the tax planning opportunities available.
The current maximum AIA of £250,000 is in place for the two year period ending on 31 December 2014. You may recall that prior to this it had fallen to £25,000 in April 2012, from its previous figure of £100,000.
These large variances in the maximum AIA have caused difficulties for businesses, particularly in the agricultural sector, when planning asset replacement policy. However the current period of high maximum AIA provides an opportunity to replace larger items of kit whilst also having the effect to reduce taxable profits for the year of purchase. Not only does this potentially save tax in the current year but it may also allow you to claw back tax for the previous year (which may have been high due to good crop prices and lower AIA) if circumstances allow for an effective averaging claim.
There may also be another opportunity to spread the AIA over two accounts years. Expenditure is generally allowed when it is incurred, however where an asset is bought on hire purchase any expenditure outstanding under the agreement at the year end can only be claimed in the accounts year the asset is brought into use. Therefore an asset purchased under a hire purchase agreement that is not in use by the year end will not fully qualify in the year of purchase, and instead the capital value outstanding under the finance agreement will be carried forward and allowed in the following year.
A good example of this may be the purchase of a combine under hire purchase. If your year end is 31 March you may enter in the hire purchase agreement in January (before the year end) but the asset will not be brought into use until the harvest following the year end. As a result the value already expended by the year end (trade in value and deposit) will be allowed as AIA, but the value outstanding under hire purchase will be carried into the following accounts year and AIA claimed accordingly.
Depending on your circumstances this can either be an effective tax planning tool, or a point to note when purchasing assets under hire purchase. You may wish to avoid purchasing the same combine in say December 2014 only to find that a large proportion of the cost is carried forward to 2015 when it may exceed the maximum AIA available at that time.
There will be transitional rules in place for accounts years that span the change and any expenditure not made by 31 December 2014 will result in the maximum AIA being restricted.
Finally, we can only assume that from 1 January 2015 the maximum AIA will fall back to £25,000 but given the varied history of the maximum AIA we cannot be sure. This does make tax planning difficult and perhaps increases the focus on ensuring that you maximise the current generous 100% tax relief, but of course only if it fits into the overall equipment replacement policy.