Benefits of Claiming Annual Investment Allowances
The Government has tried to incentivise business to accelerate investment in plant and machinery. It has done this by introducing an Annual Investment Allowance (AIA). Capital allowances are normally given over time. The AIA enables all the allowances to be accelerated in 1 year, up to an AIA annual limit. Any excess qualifying expenditure is relieved via writing down allowances over time with writing down allowance rates of either 18% or 8%.
The AIA has changed 4 times since 2008. It was originally announced that it was to reduce again down to £25,000 on 1 January 2016. However, in the 2015 Summer Budget it was announced that £200,000 will apply from 1 January 2016. This is considerably less attractive than the £500,000 which applies currently.
If a significant spend is being considered, it should be undertaken before December 2015 to qualify for the current AIA upper limit of £500,000.
| Sole traders/partners | Limited companies | AIA |
| 6 April 2014 – 31 December 2015 | 1 April 2014 – 31 December 2015 | £500,000 |
Example
Office fit out expenditure of £600,000 is incurred in 2015. This expenditure generated £300,000 of integral features, £200,000 of general pool plant and machinery and £100,000 of non qualifying expenditure. The company pays corporation tax at 20%.
By using the AIA allowance of £500,000, the relief in year 1 will generate an immediate tax saving of £100,000. Figure 1 below demonstrates this.
Without the AIA allowance, the relief in year 1 will generate a tax saving of just £12,000 – a difference of £88,000 in the first year. Fig 2 below demonstrates this.
As this example demonstrates there are significant benefits by considering the AIA at an early stage when purchasing or refurbishing property.
The legislation regarding AIA is quite complex and specialist advice should be taken.
Figure 1 –Qualifying Expenditure of Figure 2 – Qualifying Expenditure of £500,000
£500,000 with AIA claimed of £500,000 without claiming AIA of £500,000